-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P2p9VHsZvbyAtJViZ/0e937BM4QsrmqikPnXkfm5ufVusD9RcQmeNrBX/gzbIrcS 5P7088D2FAMljF/5Gvkz+g== 0001035704-02-000371.txt : 20020719 0001035704-02-000371.hdr.sgml : 20020719 20020717172706 ACCESSION NUMBER: 0001035704-02-000371 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 15 FILED AS OF DATE: 20020717 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATURAL GAS SERVICES GROUP INC CENTRAL INDEX KEY: 0001084991 STANDARD INDUSTRIAL CLASSIFICATION: OIL, GAS FIELD SERVICES, NBC [1389] FILING VALUES: FORM TYPE: SB-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-88314 FILM NUMBER: 02705042 BUSINESS ADDRESS: STREET 1: 2911 SOUTH CR1260 CITY: MIDLAND STATE: TX ZIP: 79706 BUSINESS PHONE: 9155633974 MAIL ADDRESS: STREET 1: 2911 SOUTH CUNTY ROAD 1260 CITY: MIDLAND STATE: TX ZIP: 79706 SB-2/A 1 d96705a1sbv2za.txt AMENDMENT NO.1 TO FORM SB-2 (FILE NO. 333-88314) As filed with the Securities and Exchange Commission on July 17, 2002 Registration No. 333-88314 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 AMENDMENT NO. 1 TO FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 NATURAL GAS SERVICES GROUP, INC. -------------------------------- (Name of small business issuer in its charter) Colorado 3533 75-2811855 - -------------------------------------------------------- ---------------------------- -------------------------------------- (State or jurisdiction of incorporation or organization) (Primary Standard Industrial (I.R.S. Employer Identification No.) Classification Code Number) WAYNE L. VINSON 2911 SOUTH COUNTY ROAD 1260 2911 SOUTH COUNTY ROAD 1260 MIDLAND, TEXAS 79706 MIDLAND, TEXAS 79706 (915) 563-3974 (915) 563-3974 - -------------------------------------------------------- -------------------------------------- (Address and telephone number of principal executive (Name, address and telephone number of offices and address of principal place of business) agent for service) WITH COPIES TO: THOMAS S. SMITH, ESQ. SAMUEL E. WING, ESQ. KEVIN J. KANOUFF, ESQ. JONES & KELLER, PC DORSEY & WHITNEY LLP 1625 BROADWAY STREET, 16TH FLOOR 370 SEVENTEENTH STREET, SUITE 4700 DENVER, COLORADO 80202 DENVER, COLORADO 80202 (303) 573-1600 (303) 629-3400
Approximate date of proposed sale to the public: As soon as practicable following the date on which this Registration Statement becomes effective. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE
TITLE OF EACH PROPOSED MAXIMUM AMOUNT CLASS OF SECURITIES AGGREGATE OFFERING OF TO BE REGISTERED PRICE(1) REGISTRATION FEE(5) ------------------- ------------------ ------------------- Common Stock(2) $ 10,910,625 $ 1,004 Warrants to purchase common stock(2) $ 474,375 $ 44 Common stock underlying warrants $ 13,638,281 $ 1,255 Representative's options $ 100 $ 1 Common stock(3) $ 1,185,938 $ 110 Warrants to purchase common stock(3) $ 51,563 $ 5 Common stock underlying warrants $ 1,482,422 $ 137 Total(4).................................... $ 27,743,304 $ 2,556
(1) Estimated pursuant to Rule 457(o) under the Securities Act of 1933 solely for the purpose of calculating the registration fee. (2) Includes shares of common stock and warrants the underwriters have the option to purchase from us to cover overallotments, if any. (3) Issuable upon exercise of the representative's options to purchase common stock and warrants. (4) In accordance with Rule 416 under the Securities Act of 1933, a presently indeterminable number of shares of common stock are registered hereunder which may be issued in the event provisions preventing dilution become operative, as provided in the representative's warrant for the purchase of common stock. No additional registration fee has been paid for these shares of common stock. (5) A filing fee of $2,524 has been previously paid. Accordingly, $86.39 is being submitted herewith. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ii The information in this preliminary prospectus is not complete and may be changed. We may not sell the securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell the securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED JULY 17, 2002 1,650,000 SHARES OF COMMON STOCK AND 1,650,000 WARRANTS NATURAL GAS SERVICES GROUP, INC. [LOGO] This is an initial public offering of our common stock and warrants. We expect that the public offering price of the common stock will be between $5.00 and $5.75 per share and that the public offering price of the warrants will be $0.25 per warrant. Each person who purchases securities in this offering must purchase the same number of shares of common stock and warrants. We have applied to have our common stock and warrants included for quotation on the American Stock Exchange under the symbols "NGS" and "NGS.W." The common stock and warrants will trade separately in any market that might develop. INVESTING IN THE COMMON STOCK AND WARRANTS INVOLVES CERTAIN RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 8.
PER SHARE PER WARRANT TOTAL --------- ----------- -------- Public offering prices $ 0.25 $ -------- ------- Underwriting discounts $ 0.25 $ -------- ------- Proceeds to us, before expenses $ 0.25 $ -------- -------
The underwriters have options, for 60 days from the date of this prospectus, to purchase up to an additional 247,500 shares of common stock, to purchase up to an additional 247,500 warrants, or to purchase both from us, to cover over-allotments, if any. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The underwriters expect to deliver the shares of common stock and warrants to purchasers on ________________, 2002. NEIDIGER, TUCKER, BRUNER, INC. THE DATE OF THIS PROSPECTUS IS ___________, 2002. 1 There will be four pictures on the inside front cover page of the Prospectus Picture of a trailer mounted flare system Picture of a production flare system labeled, "TRAILER MOUNTED FLARE SYSTEM" labeled, "PRODUCTION FLARE" Picture of a natural gas compressor Picture of a natural gas compressor labeled, "WELLMAKER GTA 8.3" labeled, "WELLMAKER GS-10"
2 PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider before investing in the common stock and warrants. NATURAL GAS SERVICES GROUP, INC. We provide equipment and services to the natural gas and oil industry. We manufacture, fabricate, sell and lease natural gas compressors that enhance the production of oil and gas wells and we provide maintenance services for those compressors. We define a natural gas compressor as a mechanical device with one basic goal - to deliver gas at a pressure higher than that originally existing. It may be powered by a natural gas burning engine or an electric motor to accommodate different applications. Gas compression is undertaken to transport and distribute natural gas to pipelines. Pipeline pressures vary and with the addition of new wells to the pipeline, the need for compression increases. We also manufacture and sell flare tips and ignition systems for oil and gas plant and production facilities. We define a flare tip as a burner on the upper end of a flare stack that is designed to combust waste gases to assure a clean environment. An ignition system is a pilot light or a spark generator that assures continuous ignition of the waste gases going through the burner in the flare tip. We primarily lease natural gas compressors. As of March 31, 2002, we had 220 natural gas compressors under lease to third parties. We also fabricate natural gas compressors for our customers, designing compressors to meet unique specifications dictated by well pressures, production characteristics and particular applications for which compression is sought. Although natural gas compressors generally do not suffer significant technological obsolescence, they do require routine maintenance and periodic refurbishing to prolong their useful life. As of March 31, 2002, we had written maintenance agreements with third parties relating to 81 compressors. The written maintenance agreements have terms that expire at December 31, 2005. During the year ended December 31, 2001, and during the three months ended March 31, 2002, we received revenue of approximately $704,000 (approximately 8% of our total consolidated revenue) and $265,000 (approximately 10% of our total consolidated revenue), respectively, from maintenance agreements. In addition to the written maintenance agreements, we provide maintenance as a part of the rental of our compressor leases. We have established an exchange and rebuild program to attempt to help minimize costs and maximize revenue for our customers. Under the program, we work with maintenance and operating personnel of a customer to identify equipment for exchange. When we receive a compressor for exchange because of a maintenance problem, we deliver to our customer a replacement compressor at full price. We then rebuild the exchange compressor and credit our customer an amount based on the value of the rebuilt compressor. During the year ended December 31, 2001, and during the three months ended March 31, 2002, we received revenue of approximately $402,000 (approximately 5% of our total consolidated revenue) and $67,000 (approximately 2% of our total consolidated revenue), respectively, which represents the difference between the full price of the replacement compressors and the values of the rebuilt compressors credited to our customers. We also offer a retrofitting service by repackaging a customer's compressor with a compressor that meets our customer's changed conditions. We design, manufacture, install and service flare stacks and related ignition and control devices for onshore and offshore burning of gas compounds such as hydrogen sulfide, carbon dioxide, natural gas and liquefied petroleum gases. We produce two ignition systems for varied applications: (a) a standing jet-like pipe for minimal fuel consumption, with a patented electronic igniter; and (b) an electronic sparked ignition system. During the year ended December 31, 2001, and during the three months ended March 31, 2002, we sold 54 and 10, respectively, flare systems to our customers generating approximately $703,000 (approximately 8% of our total consolidated revenue) and $275,000 (approximately 10% of our total consolidated revenue) in revenue, respectively. We were incorporated on December 17, 1998 and initially operated as a holding company of Flare King, Inc., Hi-Tech Compressor Company, L.C., NGE Leasing, Inc. and CNG Engines Company. 3 In July 2000, Flare King and Hi-Tech merged and now operate as Rotary Gas Systems, Inc. Effective March 31, 2000, we sold CNG. On March 29, 2001, we acquired, through our subsidiary, Great Lakes Compression, Inc., all of the compression related assets of Dominion Michigan Petroleum Services, Inc., an unaffiliated company that is a subsidiary of Dominion Resources, Inc. and that was in the business of manufacturing, fabricating, selling, leasing and maintaining natural gas compressors. The total purchase price was $8,000,000. We paid Dominion Michigan $1,000,000 cash and are obligated to pay Dominion Michigan an additional approximately $7,000,000 in March, 2003. The deferred purchase price bears interest at a rate of nine percent per annum, which is payable on the first business day of each month. The deferred purchase price is secured by all of the assets we acquired and the pledge of all of our stock ownership in Great Lakes Compression. We will utilize approximately $3,500,000 of the net proceeds from this offering to reduce our debt to Dominion Michigan. Our bank has committed to loan us $3,500,000 which we will use to pay the remainder of our debt to Dominion Michigan. The bank loan will be amortized over a five-year period. As a part of the transaction an affiliate of Dominion Michigan committed to purchase or to enter into five year leases for compressors totaling five thousand horsepower. The purchases or leases are to be made by December 31, 2005. We maintain our principal office at 2911 South County Road 1260, Midland, Texas 79706 and our telephone number is (915) 563-3974. OUR OPPORTUNITY The current market for gas compressors indicates that we can grow our fleet at approximately 10 gas compressors per month for the foreseeable future. This estimate is based solely on demand by our current customers in the geographic areas where we currently operate. According to the Energy Information Administration, there are over 165,000 producing gas and gas condensate wells in these geographic areas, which indicates that we can acquire more customers in our current geographic area. There are also many other geographic areas that could be added to increase our marketing area. We believe that our reputation for quality service and equipment will be instrumental in enabling us to obtain these additional customers. OPERATING PHILOSOPHY AND GROWTH STRATEGY Our operating philosophy is to increase shareholders' equity through profitable growth, primarily through internal growth of our ongoing operations. Our management believes that, with the proceeds from this offering, we can continue to accelerate internal growth by more actively pursuing leasing programs for compressors. When opportunities present themselves, we also may grow through acquisitions. However, our growth through operations and acquisitions will be limited unless we are able to obtain capital in addition to proceeds from this offering. THE OFFERING Securities offered..................................... 1,650,000 shares of our common stock and 1,650,000 warrants to purchase 1,650,000 shares of our common stock. In this offering, an equal number of shares and warrants must be purchased.
4 Warrant attributes..................................... Each warrant is exercisable to purchase one share of our common stock at an exercise price of $________ per share (125% of the public offering price of the common stock) during the four years ending _______, 2006, subject to our redemption rights. Shares of common stock to be outstanding after the offering................ 5,007,632 shares. Use of Proceeds........................................ We plan to use the net proceeds to reduce indebtedness, to pay for the manufacture and fabrication of gas compressors to be placed in our rental fleet for future leasing and for working capital. Proposed American Stock Exchange Symbols............... NGS and NGS.W
Unless the context otherwise requires, use of the terms "us," "we," "our," and similar possessive terms in this prospectus include our wholly owned subsidiaries. Unless otherwise stated, all information in this prospectus assumes no exercise of the over-allotment options by the underwriters to purchase up to an additional 247,500 shares of common stock, purchase up to an additional 247,500 warrants, or to purchase both from us. 5 SUMMARY CONSOLIDATED FINANCIAL DATA The following table summarizes our financial data. The consolidated balance sheet data includes a column entitled "As Adjusted" that reflects the sale of 1,650,000 shares of common stock and warrants at an assumed combined offering price of $6.00, net of a combined underwriting discount of $.54 and estimated total offering expenses of $520,000. You should refer to the consolidated financial statements included elsewhere in this prospectus for a more complete description of our financial condition and results of operations. CONSOLIDATED STATEMENT OF INCOME AND OTHER DATA(1):
THREE MONTHS ENDED FOR THE YEAR ENDED DECEMBER 31, MARCH 31, --------------------------------------------- ---------------------------- 1999 2000 2001 2001 2002 ----------- ----------- ----------- ----------- ----------- (in thousands except per share data) Revenue ..................................... $ 2,629 $ 3,652 $ 8,762 $ 1,410 $ 2,690 Total costs of revenue ...................... 1,194 1,535 4,942 830 1,680 ----------- ----------- ----------- ----------- ----------- Gross profit ................................ 1,435 2,117 3,820 580 1,010 Total operating expenses .................... 1,070 1,594 2,621 472 653 ----------- ----------- ----------- ----------- ----------- Income from operations ...................... 365 523 1,199 108 357 Total other income (expense) ................ (26) (159) (503) (31) (172) ----------- ----------- ----------- ----------- ----------- Income from continuing operations before income taxes .................... 339 364 696 77 185 Total income tax expense .................... 98 147 314 27 89 ----------- ----------- ----------- ----------- ----------- Income before discontinued operations ....... 241 217 382 50 96 Discontinued operations (2) ................. (212) 692 -- -- -- ----------- ----------- ----------- ----------- ----------- Net income .................................. 29 909 382 50 96 ----------- ----------- ----------- ----------- ----------- Preferred dividends ......................... -- -- 11 -- 44 ----------- ----------- ----------- ----------- ----------- Net income available to common shareholders ........................... $ 29 $ 909 $ 371 $ 50 $ 52 =========== =========== =========== =========== =========== PER COMMON SHARE DATA: Basic .................................. $ .01 $ .27 $ .11 $ .02 $ .02 =========== =========== =========== =========== =========== Diluted ................................ $ .01 $ .27 $ .11 $ .02 $ .01 =========== =========== =========== =========== =========== WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING Basic .................................. 3,357,632 3,357,632 3,357,632 3,357,632 3,357,632 Diluted ................................ 3,357,632 3,357,632 3,483,987 3,357,632 3,798,176
CONSOLIDATED BALANCE SHEET DATA(1):
MARCH 31, 2002 DECEMBER 31, 2001 -------------------------- ACTUAL ACTUAL AS ADJUSTED ----------------- -------- ----------- (in thousands) Current assets ......................... $ 3,248 $ 3,490 $ 8,479 Total assets ........................... 18,810 19,568 24,557 Current liabilities .................... 2,049 9,761 6,261 Shareholders' equity ................... 5,781 5,845 14,334
6 CONSOLIDATED STATEMENT OF CASH FLOWS:
FOR THE THREE MONTHS FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31, ------------------------------------------- ------------------------- 1999 2000 2001 2001 2002 ------- ------- ------- ------- ------- (in thousands) Cash flows provided by (used in) operating activities ................... $ 307 $ (253) $ 840 $ (89) $ (77) Cash flow used in investment activities ............................. (1,116) (1,836) (3,087) (1,388) (705) Cash flow provided by financing activities ............................. 2,248 698 2,611 1,357 412 OTHER DATA EBITDA(3) .............................. $ 507 $ 1,619 $ 2,523 $ 280 $ 697
INFORMATION PERTAINING TO COMPRESSORS LEASED
COMPRESSORS LEASED ------------------------------ 1999 2000 2001 ---- ---- ---- Leased at beginning of year ............ 14 41 75 Leased during year ..................... 27 34 152 Returned during year ................... 0 0 20 Leased at year end ..................... 41 75 207
- ---------------- (1) The financial information reflects the acquisition by us of the compression related assets of Dominion Michigan on March 29, 2001. The purchase price was $8,000,000 of which $1,000,000 was paid at closing and the net balance was financed by Dominion Michigan. The operations and assets of Dominion Michigan that we acquired are included in our consolidated financial statements commencing on April 1, 2001. (2) On March 31, 2000, we disposed of CNG, a former subsidiary, in a transaction whereby we transferred all of the common stock of CNG to the former owner in exchange for all of the former owner's shares of our outstanding common stock (692,368 shares) and a note receivable for $350,000. During the year ended December 31, 2000, the former owner defaulted on all payments due under the note receivable, and the entire amount has been reserved and reflected as a reduction in the gain from discontinued operations. The sale resulted in a non-taxable gain from discontinued operations of approximately $944,000. Pre-tax loss from discontinued operations of approximately $232,000 in the summary consolidated statement of income data reflects the net loss from operations of CNG from January 1, 2000 through the date of disposal. Total revenue of CNG was approximately $3,915,000 in 1999 and approximately $828,000 from January 1, 2000 through the date of disposal. (3) The row entitled "EBITDA" reflects net income or loss before interest, taxes, depreciation and amortization. EBITDA is a measure used by analysts and investors as an indicator of operating cash flow since it excludes the impact of movements in working capital items, non-cash charges and financing costs. However, EBITDA is not a measure of financial performance under generally accepted accounting principles and should not be considered a substitute for other financial measures of performance. EBITDA as calculated by us may not be comparable to EBITDA as calculated and reported by other companies. 7 RISK FACTORS You should carefully consider the following risks before you decide to buy the common stock and warrants. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that are not presently known to us or that we currently deem immaterial may also impair our business. If any of the events described in the following risks actually occur, our business, financial condition and results of operations could be materially adversely affected. In such case, the trading prices of our common stock or warrants could decline and you could lose all or part of your investment. OUR CURRENT DEBT IS LARGE AND MAY NEGATIVELY IMPACT OUR CURRENT AND FUTURE FINANCIAL STABILITY. As of March 31, 2002, we had an aggregate of approximately $11,700,000 of outstanding indebtedness not including accounts payable and accrued expenses of approximately $1,100,000. As a result of our significant indebtedness, we might not have the ability to incur any substantial additional indebtedness. The level of our indebtedness could have several important effects on our future operations, including: o our ability to obtain additional financing for working capital, acquisitions, capital expenditures and other purposes may be limited; o a significant portion of our cash flow from operations may be dedicated to the payment of principal and interest on our debt, thereby reducing funds available for other purposes; and o our significant leverage could make us more vulnerable to economic downturns. IF WE ARE UNABLE TO SERVICE OUR DEBT, WE WILL LIKELY BE FORCED TO TAKE REMEDIAL STEPS THAT ARE CONTRARY TO OUR BUSINESS PLAN. As of March 31, 2002, our debt service requirements on a monthly, quarterly and annual basis were $130,915, $392,745 and $1,570,980, respectively. In addition, after applying the proceeds from this offering and after borrowing from our bank the remaining approximately $3,450,000 of debt that we still will owe Dominion Michigan, it is possible that our business will not generate sufficient cash flow from operations to meet our debt service requirements and the payment of principal when due. If this were to occur, we may be forced to: o sell assets at disadvantageous prices; o obtain additional financing; or o refinance all or a portion of our indebtedness on terms that may be very unfavorable to us. 8 OUR CURRENT BANK LOAN CONTAINS, AND OUR PROPOSED BANK LOAN WILL CONTAIN COVENANTS THAT LIMIT OUR OPERATING AND FINANCIAL FLEXIBILITY AND, IF BREACHED, COULD EXPOSE US TO SEVERE REMEDIAL PROVISIONS. Under the terms of the bank loans, we must: o comply with a debt to asset ratio; o maintain minimum levels of tangible net worth; o not exceed specified levels of debt; o comply with a cash flow to fixed charges ratio; o comply with a debt to net worth ratio; and o not incur additional debt over a specified amount. Our ability to meet the financial ratios and tests under our current bank loan and proposed bank loan can be affected by events beyond our control, and we may not be able to satisfy those ratios and tests. A breach under either could permit the bank to accelerate the debt so that it is immediately due and payable. No further borrowings would be available under the credit facility. If we were unable to repay the debt, the bank could proceed against our assets. APPROXIMATELY 78% OF OUR COMPRESSOR LEASES ARE LEASED FOR TERMS OF SIX MONTHS OR LESS THAT, IF TERMINATED, WOULD ADVERSELY IMPACT OUR REVENUE AND OUR ABILITY TO RECOVER OUR INITIAL EQUIPMENT COSTS. Approximately 78% of our compressor leases are for terms of up to six months. There is a possibility that these leases could be terminated by lessees within short periods of time and that we may not be able to recover the cost of the compressor for which a lease is terminated. THE ANTICIPATED REVENUE FROM THE AFFILIATE OF DOMINION MICHIGAN CANNOT BE GUARANTEED. In connection with our acquisition of the compression related assets of Dominion Michigan, an affiliate of Dominion Michigan committed to purchase compressors from us or enter into five year leases of compressors with us totaling five-thousand horsepower. If, for any reason, the affiliate does not fulfill this obligation to any material extent, our cash flow will be significantly reduced and we may not be able to pay the principal or interest on our debt as it becomes due. WE ARE DEPENDENT ON A FEW SUPPLIERS FOR SOME OF OUR COMPRESSOR COMPONENTS AND THE LOSS OF ONE OF THESE SUPPLIERS COULD CAUSE A DELAY IN THE MANUFACTURING OF OUR COMPRESSORS AND REDUCE OUR REVENUE. We currently obtain approximately 35% of our compressor components from two suppliers. We order from these suppliers as needed and we have no long-term contracts with either supplier. If either of these suppliers should curtail its operations or be unable to meet our needs, we would encounter delays in supplying our customers with compressors until an alternative supplier, if any, could be found. Such delays in our manufacturing process could reduce our revenue and negatively impact our relationships with customers. 9 DECREASED OIL AND GAS INDUSTRY EXPENDITURE LEVELS WOULD ADVERSELY AFFECT OUR REVENUE. Our revenue is derived from expenditures in the oil and gas industry which, in turn, are based on budgets to explore for, develop and produce oil and natural gas. If these expenditures decline, our revenue will suffer. The industry's willingness to explore, develop and produce depends largely upon the prevailing view of future oil and gas prices. Many factors affect the supply and demand for oil and gas and, therefore, influence product prices including: o the level of oil and gas production; o the levels of oil and gas inventories; o the expected cost of developing new reserves; o the cost of producing oil and gas; o the level of drilling activity; o inclement weather; o worldwide economic activity; o regulatory and other federal and state requirements in the United States; o the ability of the Organization of Petroleum Exporting Countries to set and maintain production levels and prices for oil; o terrorist activities in the United States and elsewhere; o the cost of developing alternate energy sources; o environmental regulation; and o tax policies. If the demand for oil and gas decreases, then demand for our compressors likely will decrease. THE INTENSE COMPETITION IN OUR INDUSTRY COULD RESULT IN REDUCED PROFITABILITY AND LOSS OF MARKET SHARE FOR US. We sell or lease our products and sell our services in competitive markets. In most of our business segments, we compete with the oil and gas industry's largest equipment and service providers who have greater name recognition than we do. These companies also have substantially greater financial resources, larger operations and greater budgets for marketing, research and development than we do. They may be better able to compete in making equipment available quickly and more efficiently, meeting delivery schedules or reducing prices. As a result, we could lose customers and market share to those competitors. These companies may also be better positioned than us to successfully endure down turns in the oil and gas industry. Our operations may be adversely affected if our current competitors or new market entrants introduce new products or services with better prices, features, performance or other competitive characteristics than 10 our products and services. Competitive pressures or other factors also may result in significant price competition that could harm our revenue and our business. WE MIGHT BE UNABLE TO EMPLOY ADEQUATE TECHNICAL PERSONNEL WHICH COULD HAMPER OUR PLANS FOR EXPANSION OR INCREASE OUR COSTS. Many of the compressors that we sell or lease are technically complex and often must perform in harsh conditions. We believe that our success depends upon our ability to employ and retain a sufficient number of technical personnel who have the ability to design, utilize, enhance and maintain these compressors. Our ability to expand our operations depends in part on our ability to increase our skilled labor force. The demand for skilled workers is high and supply is limited. A significant increase in the wages paid by competing employers could result in a reduction of our skilled labor force, or cause an increase in the wage rates that we must pay or both. If either of these events were to occur, our cost structure could increase and our operations and growth potential could be impaired. IF WE DO NOT DEVELOP, PRODUCE AND COMMERCIALIZE NEW COMPETITIVE TECHNOLOGIES AND PRODUCTS, OUR REVENUE MAY DECLINE. The markets for natural gas compressor products and services and for flare systems, ignition systems and components for plant and production facilities are characterized by continual technological developments. As a result, substantial improvements in the scope and quality of product function and performance can occur over a short period of time. If we are not able to develop commercially competitive products in a timely manner in response to changes in technology, our business and revenue may be adversely affected. We may encounter financial constraints or technical or other difficulties that could delay introduction of new products and services in the future. Our competitors may introduce new products before we do and achieve a competitive advantage. Additionally, the time and expense invested in product development may not result in commercial applications that provide revenue. We could be required to write off our entire investment in a new product that does not reach commercial viability. Moreover, we may experience operating losses after new products are introduced and commercialized because of high start-up costs, unexpected manufacturing costs or problems, or lack of demand. WE ARE SUBJECT TO EXTENSIVE ENVIRONMENTAL LAWS AND REGULATIONS THAT COULD REQUIRE US TO TAKE COSTLY COMPLIANCE ACTIONS THAT COULD HARM OUR FINANCIAL CONDITION. Our manufacturing and maintenance operations are significantly affected by stringent and complex federal, state and local laws and regulations governing the discharge of substances into the environment or otherwise relating to environmental protection. In these operations, we generate and manage hazardous wastes such as solvents, thinner, waste paint, waste oil, washdown wastes, and sandblast material. We attempt to use generally accepted operating and disposal practices and, with respect to acquisitions, will attempt to identify and assess whether there is any environmental risk before completing an acquisition. Based on the nature of the industry, however, hydrocarbons or other wastes may have been disposed of or released on or under properties owned, leased, or operated by us or on or under other locations where such wastes have been taken for disposal. The waste on these properties may be subject to federal or state environmental laws that could require us to remove the wastes or remediate sites where they have been released. We could be exposed to liability for cleanup costs, natural resource and other damages as a result of our conduct or the conduct of, or conditions caused by, prior operators or other third parties. Environmental laws and regulations have changed in the past, and they are likely to change in the future. If existing regulatory requirements or enforcement policies change, we may be required to make significant unanticipated capital and operating expenditures. 11 Any failure by us to comply with applicable environmental laws and regulations may result in governmental authorities taking actions against our business that could harm our operations and financial condition, including the: o issuance of administrative, civil and criminal penalties; o denial or revocation of permits or other authorizations; o reduction or cessation in operations; and o performance of site investigatory, remedial or other corrective actions. WE COULD BE SUBJECT TO SUBSTANTIAL LIABILITY CLAIMS THAT COULD HARM OUR FINANCIAL CONDITION. Our products are used in hazardous drilling and production applications where an accident or a failure of a product can cause personal injury, loss of life, damage to property, equipment or the environment, or suspension of operations. While we maintain insurance coverage, we face the following risks under our insurance coverage: o we may not be able to continue to obtain insurance on commercially reasonable terms; o we may be faced with types of liabilities that will not be covered by our insurance, such as damages from significant product liabilities and from environmental contamination; o the dollar amount of any liabilities may exceed our policy limits; and o we do not maintain coverage against the risk of interruption of our business. Any claims made under our policy will likely cause our premiums to increase. Any future damages caused by our products or services that are not covered by insurance, are in excess of policy limits or are subject to substantial deductibles, would reduce our earnings and our cash available for operations. LIABILITY TO CUSTOMERS UNDER WARRANTIES MAY MATERIALLY AND ADVERSELY AFFECT OUR EARNINGS. We provide warranties as to the proper operation and conformance to specifications of the equipment we manufacture. Our equipment is complex and often deployed in harsh environments. Failure of this equipment to operate properly or to meet specifications may increase our costs by requiring additional engineering resources and services, replacement of parts and equipment or monetary reimbursement to a customer. We have in the past received warranty claims and we expect to continue to receive them in the future. To the extent that we incur substantial warranty claims in any period, our reputation, our ability to obtain future business and our earnings could be materially and adversely affected. LOSS OF KEY MEMBERS OF OUR MANAGEMENT COULD ADVERSELY AFFECT OUR BUSINESS WHILE WE ATTEMPT TO FIND THEIR REPLACEMENTS. We depend on the continued employment and performance of Wayne L. Vinson, our President and the President of Rotary Gas Systems, Scott W. Sparkman, our Secretary and the Executive Vice President of NGE Leasing, Alan P. Kurus, our Vice President-Sales and Marketing, Earl R. Wait, our Treasurer and Chief Financial Officer, and other key members of our management. We currently have employment agreements only with Wayne L. Vinson and Earl R. Wait. If any of our key managers resigns or becomes unable to 12 continue in his present role and is not adequately replaced, our business operations could be materially adversely affected. We do not maintain any "key man" life insurance for any of our officers, except for policies totaling $1,500,000 on the life of Wayne L. Vinson. We are the beneficiary of these policies. WE ARE RELIANT ON OUR CURRENT CUSTOMERS FOR FUTURE CASH FLOWS AND THE LOSS OF ONE OR MORE OF OUR CURRENT CUSTOMERS COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS. Our business is dependent not only on securing new customers but also on maintaining current customers. Dominion Exploration & Production, Inc., an affiliate of Dominion Resources, Inc., accounted from approximately 34% and approximately 26% of our consolidated revenue during the three months ended March 31, 2002, and the year ended December 31, 2001, respectively. The loss of one or more of our significant customers would have an adverse effect on our revenue and results of operations. PROVISIONS CONTAINED IN OUR GOVERNING DOCUMENTS COULD HINDER A CHANGE IN OUR CONTROL. Our articles of incorporation and bylaws contain provisions that may discourage acquisition bids and may limit the price investors are willing to pay for our common stock and warrants. Our articles of incorporation and bylaws provide that: o directors will be elected for three-year terms, with approximately one-third of the board of directors standing for election each year; o cumulative voting is not allowed which limits the ability of minority shareholders to elect any directors; o the unanimous vote of the board of directors or the affirmative vote of the holders of not less than 80% of the votes entitled to be cast by the holders of all shares entitled to vote in the election of directors is required to change the size of the board of directors; and o directors may only be removed for cause by holders of not less than 80% of the votes entitled to be cast on the matter. Our board of directors has the authority to issue up to five million shares of preferred stock. The board of directors can fix the terms of the preferred stock without any action on the part of our shareholders. The issuance of shares of preferred stock may delay or prevent a change in control transaction. In addition, preferred stock could be used in connection with the board of director's adoption of a shareholders' rights plan (also known as a poison pill), which would make it much more difficult to effect a change in control of our company through acquiring or controlling blocks of stock. Also, after completion of this offering, our directors and officers as a group will continue to beneficially own stock. Although this is not a majority of our stock, it confers substantial voting power in the election of directors and management of our company. This would make it difficult for other minority shareholders, such as the investors in this offering, to effect a change in control or otherwise extend any significant control over the management of our company. This may adversely affect the market price and interfere with the voting and other rights of our common stock. YOU MAY BE UNABLE TO EXERCISE THE WARRANTS IF WE ARE UNABLE TO QUALIFY OUR SECURITIES UNDER APPLICABLE SECURITIES LAWS OR IF WE REDEEM YOUR WARRANTS. You will initially own one warrant for each share of common stock purchased in this offering. You may purchase one share of common stock through the exercise of one warrant on payment of the $___ exercise price. You may only exercise your warrants if a registration statement relating to the common stock underlying the warrants is then in effect and we have complied with applicable state securities laws. There is a risk that we may be unsuccessful in maintaining a current registration statement covering the common stock underlying the warrants. We may not have sufficient funds or may not be able to obtain the financial statements necessary to maintain a current registration statement covering the common stock underlying the warrants. As a result, you may be unable to exercise the warrants for this or other reasons. We may also redeem your warrants under certain circumstances. Your warrants may be exercised during the notice period 13 prior to the date of redemption. If you do not exercise your warrants prior to the redemption date, you will only be entitled to receive the redemption price of $0.25 per warrant. IF OUR COMMON STOCK DOES NOT TRADE FOR A CERTAIN PRICE PER SHARE AFTER SIX MONTHS FROM THE CLOSING OF THIS OFFERING, OUR PREFERRED STOCK WILL NOT AUTOMATICALLY CONVERT INTO OUR COMMON STOCK. Our currently outstanding 381,654 shares of 10% Convertible Series A Preferred Stock will automatically convert into shares of our common stock if, after six months from the closing of this offering, our common stock trades at or above $6.50 per share for 20 consecutive trading days. Until such event occurs, we will be required to: o continue to pay the preferred stock dividend; o permit the preferred stock holders to vote as a separate class where required by Colorado law; and o pay the holders of preferred stock a preference upon our liquidation. The same consequences would likely result from any additional preferred stock that our board of directors may authorize for issuance in the future, as well as additional rights and preferences that could be included in the terms of the preferred stock. SALES OF LARGE NUMBER OF SHARES COULD ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK. Substantial sales of our common stock, including shares issued upon the exercise of outstanding options and warrants, in the public market following this offering, or the perception that these sales could occur, may have a depressive effect on the market price of our common stock and could impair our ability to raise capital or make acquisitions through the issuance of equity securities. As of March 31, 2002, there were 3,357,632 shares of our common stock outstanding. Of these shares, 1,367,691 are freely tradable without restriction or further registration under the securities laws and 1,989,941 shares are held by directors, officers, and other of our affiliates. The shares held by our directors, officers and other affiliates are subject to the resale limitations of Rule 144 described below. Further, our officers, directors and beneficial holders of 5% or more of our outstanding shares of common stock have agreed, pursuant to lock-up agreements relating to the transfer of shares of our common stock, that they will not sell, transfer, hypothecate or convey any of our shares of common stock by registration or otherwise for a period of twelve months from the date of this prospectus without the prior written consent of the representative of the underwriters. However, after the lock-up expires, our officers, directors and holders of 5% or more of our shares will be able to sell their shares as the securities laws and market conditions permit. All shares of common stock sold in this offering will be freely tradable, unless purchased by our affiliates. In general, under Rule 144 adopted under the Securities Act, any person that beneficially owns restricted securities for one year and any person deemed to be an affiliate of our company is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of (1) 1% of the then outstanding shares of common stock of our company or (2) the average weekly trading volume in common stock during the four calendar weeks preceding such sale. A person that is not an affiliate and has held restricted securities for at least two years is entitled to sell such shares without any limitation. WE WILL HAVE A COMPARATIVELY LOW NUMBER OF SHARES OF COMMON STOCK AND WARRANTS OUTSTANDING AND, THEREFORE, OUR COMMON STOCK AND WARRANTS MAY SUFFER FROM LIMITED LIQUIDITY AND THEIR PRICES WILL LIKELY BE VOLATILE AND THEIR VALUE MAY BE ADVERSELY AFFECTED. 14 Because the number of freely transferable shares of our common stock and number of our warrants will be low, the trading prices of our common stock and warrants will likely be subject to significant price fluctuations and limited liquidity. This may adversely affect the value of your investment. In addition, our common stock and warrants could be subject to fluctuations in response to variations in quarterly operating results, changes in management, future announcements concerning us, general trends in the industry and other events or factors as well as those described above. OUTSTANDING DERIVATIVE SECURITIES MAY DILUTE THE VALUE OF YOUR INVESTMENT. We have issued and outstanding options and warrants to acquire up to 916,270 shares of our common stock at exercise prices ranging from $2.00 to $3.25 per share and a warrant to purchase 38,165 shares of our 10% Convertible Series A Preferred Stock at $3.25 per share. Under the terms of the options and warrants, the holders will have an opportunity to profit from a rise in the market price of our common stock without assuming the risks of ownership. This may have an adverse effect on the terms upon which we could obtain additional capital. It should be expected that the holders of such options and warrants will exercise them at a time when we would be able to issue stock at prices higher than the exercise prices of the options and warrants. WE MUST EVALUATE OUR INTANGIBLE ASSETS ANNUALLY FOR IMPAIRMENT. Our intangible assets are recorded at cost less accumulated amortization and consist of goodwill and patent costs. Through December 31, 2001, goodwill was amortized using the straight-line method over 15 years and patent costs were amortized over 13 to 15 years. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." SFAS 142 provides that: 1) goodwill and intangible assets with indefinite lives will no longer be amortized; 2) goodwill and intangible assets with indefinite lives must be tested for impairment at least annually; and 3) the amortization period for intangible assets with finite lives will no longer be limited to forty years. In the event that we determine our intangible assets with indefinite lives have been impaired, we must record a write-down of those assets on our statement of operations during the period of impairment. Our determination of impairment will be based on various factors, including any of the following factors, if they materialize: o significant underperformance relative to expected historical or projected future operating results; o significant changes in the manner of our use of the acquired assets or the strategy for our overall business; o significant negative industry or economic trends; o significant decline in our stock price for a sustained period; and o our market capitalization relative to net book value. 15 We adopted SFAS 142 as of January 1, 2002. Based on an independent valuation in July 2002 of our reporting units with goodwill, we do not believe that adoption of SFAS 142 will have a material adverse effect on us through at least 2002. In the future it could result in impairments of our intangible assets or goodwill. We expect to continue to amortize our intangible assets with finite lives over the same time periods as previously used, and we will test our intangible assets with indefinite lives for impairment at least once each year. In addition, we are required to assess the consumptive life, or longevity, of our intangible assets with finite lives and adjust their amortization periods accordingly. Our net intangible assets were recorded on our balance sheet at approximately $2,800,000 as of March 31, 2002, and we expect the carrying value of net intangible assets will increase significantly if we acquire additional businesses. Any impairments in future periods of those assets, or a reduction in their consumptive lives, could materially and adversely affect our statement of operations and financial position. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 requires the recognition of an impairment loss if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and measures the impairment loss as the difference between the carrying amount and fair value of the assets. Although we do not believe that the requirements of SFAS 144 will have a material adverse effect on us through 2002, it could in the future require material write-downs of our long-lived assets. 16 CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS This prospectus, including the sections entitled "Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," contains forward-looking statements. These statements relate to future events or our future financial performance, including our business strategy and product development plans, and involve known and unknown risks and uncertainties. These risks and other factors include those listed under "Risk Factors" and elsewhere in this prospectus. These factors may cause our actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "could," "expects," "intends," "plans," "anticipated," "believes," "estimated," "potential," or the negative of these terms or other comparable terminology. When considering these forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this prospectus. 17 USE OF PROCEEDS We estimate that our net proceeds from the sale of the 1,650,000 shares of common stock and 1,650,000 warrants in this offering, assuming a combined initial public offering price of $6.00 per share and warrant, will be approximately $8,489,000. If the underwriters exercise their over-allotment options in full, our net proceeds will be approximately $9,810,650. Our net proceeds is the amount we expect to receive from this offering after deducting the underwriting discounts and estimated offering expenses payable by us. We intend to use these proceeds for the following purposes: o $3,500,000 to reduce indebtedness; o $4,700,000 for the manufacture of gas compressors to be placed in our rental fleet and leased over the next one to two years; and o the remainder for working capital. The $3,500,000 allocated to pay indebtedness was incurred in connection with our acquisition of the compression related assets of Dominion Michigan on March 29, 2001. After the payment, we will still owe approximately $3,500,000 to Dominion Michigan. The balance bears interest at a rate of nine percent per annum and is due in March 2003. We have secured a letter from a bank, wherein the bank, subject to the closing of this offering, has committed to loan us $3,500,000 to pay the balance of the amount we owe to Dominion Michigan. The loan will bear interest at prime plus 1% and will be payable in equal amounts of principal plus interest over a period of five years. The loan will be collateralized with our accounts receivable, inventory and equipment and the $1,000,000 life insurance policy on the life of Wayne Vinson and will be guaranteed by our subsidiaries. The loan will prohibit us from the payment of dividends without the consent of the bank. A condition to the closing of this offering is that the loan transaction close simultaneously with the closing of this offering. If the underwriters exercise their over-allotment options, we will allocate the additional net proceeds of up to $1,321,560 to working capital. Working capital will be used to pay such items as rent, office expenses, equipment, equipment repairs, salaries and our other day-to-day costs of doing business. The previous paragraphs describe our present estimates of our use of the net proceeds of this offering based on our current plans and estimates of anticipated expenses. Our actual expenditures may vary from these estimates. We may also find it necessary or advisable to reallocate the net proceeds within the uses outlined above or to use portions of the net proceeds for other purposes. Pending these uses, we will invest the net proceeds of this offering primarily in cash equivalents or direct or guaranteed obligations of the United States government. 18 DIVIDEND POLICY We have never declared or paid any dividends on our common stock. We anticipate that, for the foreseeable future, all earnings will be retained for use in our business and no cash dividends will be paid to holders of our common stock. If we were to pay cash dividends in the future on the common stock, it would be dependent upon our: o financial condition, o results of operations, o current and anticipated cash requirements, o plans for expansion, o restrictions, if any, under debt obligations, as well as other factors that our board of directors deemed relevant. Our agreement with our bank and our commitment from our bank contain provisions that restrict us from paying dividends on our common stock. We have 381,654 shares of our 10% Convertible Series A Preferred Stock outstanding. Holders of that stock are entitled to cash dividends paid quarterly at a rate equal to 10% per annum or $0.325 per share annually. The 10% Convertible Series A Preferred stock will automatically convert into our common stock at any time after six months from the closing of this offering, if our common stock trades for 20 consecutive trading days after the six month period at a price of $6.50 or more per share. 19 DILUTION As of March 31, 2002, we had a net tangible book value of $3,093,572 or approximately $0.92 per share of common stock. After giving effect to the sale of 1,650,000 shares of common stock at an assumed initial offering price of $5.75 per share, our pro forma net tangible book value, based on 5,007,632 shares of common stock outstanding as of March 31, 2002, would have been $11,207,197 or $2.24 per share of common stock. This amount represents an immediate increase in pro forma net tangible book value of $1.32 per share of common stock to the existing holders of common stock and an immediate dilution of $3.51 per share of common stock to new investors. "Dilution" is determined by subtracting pro forma net tangible book value per share of common stock after the offering from the offering price per share of common stock, as illustrated by the following table: Assumed initial public offering price per share of common stock... $ 5.75 Net tangible book value per share of common stock as of March 31, 2002..................................... $ 0.92 Increase in pro forma net tangible book value per share of common stock attributable to new investors..................... $ 1.32 ----------- Pro forma net tangible book value per share of common stock after the offering....................................... $ 2.24 ----------- Dilution per share of common stock to new investors............... $ 3.51 =========== Dilution as percentage of assumed offering price.................. 61% ===========
The following table sets forth as of March 31, 2002, the number of shares of common stock acquired from us, the total cash consideration paid to us and the average cash price per share of common stock paid to us by our existing shareholders and by new investors (assuming the sale of 1,650,000 shares of common stock at an assumed initial public offering price of $5.75 per share, before deduction of the underwriting discount and other estimated offering expenses):
VALUE OF AVERAGE PRICE SHARES PURCHASED CONSIDERATION PAID PER SHARE -------------------------- ------------------------------ ------------- NUMBER PERCENT AMOUNT PERCENT --------- ------- ----------- ------- Existing shareholders....... 3,357,632 67.1% $ 3,456,131 26.7% $1.03 New investors............... 1,650,000 32.9 9,487,500 73.3 $5.75 --------- ----- ----------- ------ Total....................... 5,007,632 100.0% $12,943,631 100.0% ========= ====== =========== ======
The foregoing information assumes no conversion of our outstanding preferred stock, no exercise of the warrants being offered hereby, no exercise of outstanding options and warrants and no exercise of the underwriters' over-allotment options for the purchase of common stock and warrants. To the extent that outstanding preferred stock is converted or outstanding options or warrants are exercised at prices below the assumed public offering price of $5.75 per share of common stock, there will be further dilution to investors. 20 CAPITALIZATION The following table sets forth our capitalization as of March 31, 2002. Our capitalization is presented: o on an actual basis; and o on an as adjusted basis to reflect our receipt of the estimated net proceeds from the sale of 1,650,000 shares of common stock at an assumed initial public offering price of $5.75 per share and 1,650,000 warrants at $0.25 per warrant, after deducting underwriting discounts and other estimated offering expenses.
MARCH 31, 2002 -------------------------------- ACTUAL AS ADJUSTED ----------- ----------- Borrowings: Bank line of credit ............................................. $ 675,000 $ 675,000 Subordinated notes .............................................. 1,290,257 1,290,257 Capital leases .................................................. 53,719 53,719 Long-term debt .................................................. 9,723,826 6,223,826 ----------- ----------- Total borrowings: .................................................... $11,742,802 $ 8,242,802 Shareholders' equity: Preferred Stock, par value $0.01 per share; 5,000,000 shares authorized; 381,654 shares issued and outstanding ..................................................... 3,817 3,817 Common stock, $0.01 par value 30,000,000 shares authorized; 3,357,632 shares issued and outstanding, 5,007,632 shares issued and outstanding, as adjusted ............................. 33,576 50,076 Additional paid-in capital ...................................... 4,455,495 12,927,995 Retained earnings ............................................... 1,352,377 1,352,377 ----------- ----------- Total shareholders' equity .................................... $ 5,845,265 $14,334,265 ----------- ----------- Total capitalization ................................................ $17,588,067 $22,577,067 =========== ===========
The foregoing table does not give effect to: o 916,270 shares of common stock issuable on exercise of outstanding options and warrants; o 1,650,000 shares of common stock issuable on exercise of the warrants being offered hereby; o 247,500 shares of common stock issuable upon exercise of the underwriters' over-allotment option for common stock; and o 247,500 warrants issuable upon exercise of the underwriters' over-allotment option for warrants. 21 SELECTED CONSOLIDATED FINANCIAL DATA You should read the selected consolidated data for the fiscal years ended December 31, 1999, 2000 and 2001, and for the three months ended March 31, 2002, in the tables below together with our consolidated financial statements and the related notes and the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this prospectus. Our historical results are not necessarily indicative of our future results. SUMMARY CONSOLIDATED INCOME AND OTHER DATA(1): (in thousands)
THREE MONTHS ENDED FOR THE YEAR ENDED DECEMBER 31 MARCH 31 -------------------------------------------- ---------------------------- 1999 2000 2001 2001 2002 ------------ ------------ ------------ ------------ ------------ (unaudited) Total revenue ............................... $ 2,629 $ 3,652 $ 8,762 $ 1,410 $ 2,690 Total costs of revenue ...................... 1,194 1,535 4,942 830 1,680 ------------ ------------ ------------ ------------ ------------ Gross profit ................................ 1,435 2,117 3,820 580 1,010 Total operating expenses .................... 1,070 1,594 2,621 472 653 ------------ ------------ ------------ ------------ ------------ Income from operations ...................... 365 523 1,199 108 357 Total other income (expense) ................ (26) (159) (503) (31) (172) ------------ ------------ ------------ ------------ ------------ Income from continuing operations before income taxes .......................... 339 364 696 77 185 Total income tax expense .................... 98 147 314 27 89 Income before discontinued operations........ 241 217 382 50 96 Discontinued operations (2) ................. (212) 692 -- -- -- ------------ ------------ ------------ ------------ ------------ Net income .................................. $ 29 $ 909 $ 382 $ 50 $ 96 ------------ ------------ ------------ ------------ ------------ Preferred dividends ......................... -- -- 11 -- 44 ------------ ------------ ------------ ------------ ------------ Net income available to common shareholders........................... $ 29 $ 909 $ 371 $ 50 $ 52 ============ ============ ============ ============ ============ PER COMMON SHARE DATA: Basic ....................................... $ .01 $ .27 $ .11 $ .02 $ .02 ============ ============ ============ ============ ============ Diluted ..................................... $ .01 $ .27 $ .11 $ .02 $ .01 ============ ============ ============ ============ ============ WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING Basic ....................................... 3,357,632 3,357,632 3,357,632 3,357,632 3,357,632 Diluted ..................................... 3,357,632 3,357,632 3,483,987 3,357,632 3,798,176
SUMMARY CONSOLIDATED BALANCE SHEET DATA (1):
DECEMBER 31, 2001 MARCH 31, 2002 ----------------- ----------------------------- ACTUAL ACTUAL AS ADJUSTED ------------ ------------ ------------ Current assets .................... $ 3,248 $ 3,490 $ 8,479 Total assets ...................... 18,810 19,568 24,577 Current liabilities ............... 2,049 9,761 6,261 Shareholders' equity .............. 5,781 5,845 14,334
22 CONSOLIDATED STATEMENT OF CASH FLOWS (1):
FOR THE PERIOD FOR THE YEAR ENDED DECEMBER 31 ENDED MARCH 31 -------------------------------------- ------------------------ 1999 2000 2001 2001 2002 ---------- ---------- ---------- ---------- ---------- Cash flows provided by (used in) operating activities ........................ $ 307 $ (253) $ 840 $ (89) $ (77) Cash flow used in investment activities...... (1,116) (1,836) (3,087) (1,388) (705) Cash flow provided by financing activities .................................. 2,248 698 2,611 1,357 412 OTHER DATA EBITDA(3) ................................... $ 507 $ 1,619 $ 2,523 $ 280 $ 697
INFORMATION PERTAINING TO COMPRESSORS LEASED
COMPRESSORS LEASED ------------------------ 1999 2000 2001 ---- ---- ---- Leased at beginning of year........... 14 41 75 Leased during year.................... 27 34 152 Returned during year.................. 0 0 20 Leased at year end.................... 41 75 207
- ---------- (1) The financial information reflects the acquisition by us of the compression related assets of Dominion Michigan on March 29, 2001. The purchase price was $8,000,000 of which $1,000,000 was paid at closing and the net balance was financed by Dominion Michigan. The operations and assets of Dominion Michigan that was acquired are included in our consolidated financial statements commencing on April 1, 2001. (2) On March 31, 2000, we disposed of CNG in a transaction whereby we transferred all of the common stock of CNG to the former owner in exchange for all of the former owner's shares of our outstanding common stock (692,368 shares) and a note receivable for $350,000. During the year ended December 31, 2000, the former owner defaulted on all payments due under the note receivable, and the entire amount has been reserved and reflected as a reduction in the gain from discontinued operations. The sale resulted in a non-taxable gain from discontinued operations of approximately $944,000. Pre-tax loss from discontinued operations of approximately $232,000 in the summary consolidated statement of income data reflects the net loss from operations of CNG from January 1, 2000 through the date of disposal. Total revenue of CNG was approximately $3,915,000 in 1999 and approximately $828,000 from January 1, 2000 through the date of disposal. (3) The row entitled "EBITDA" reflects net income or loss before interest, taxes, depreciation and amortization. EBITDA is a measure used by analysts and investors as an indicator of operating cash flow since it excludes the impact of movements in working capital items, non-cash charges and financing costs. However, EBITDA is not a measure of financial performance under generally accepted accounting principles and should not be considered a substitute for other financial measures of performance. EBITDA as calculated by us may not be comparable to EBITDA as calculated and reported by other companies. 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the consolidated financial statements and attached notes thereto and the other financial information included elsewhere in this prospectus. This discussion contains forward looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward looking statements as a result of any number of factors, including those set forth under the section entitled, "Risk Factors" and elsewhere in this prospectus. OVERVIEW We combine the operations of Rotary Gas Systems, NGE Leasing and Great Lakes Compression. These entities provide products and services to the oil and gas industry and are engaged in (1) the manufacture, sale and rental of natural gas compressors to enhance the productivity of oil and gas wells, and (2) the manufacture, sale and rental of flares and flare ignition systems for plant and production facilities. We are the parent company and provide administrative and management support and, therefore, have expenses associated with that activity. We acquired the compression related assets of Great Lakes from Dominion Michigan on March 29, 2001. This acquisition significantly increased the number of compressor units that we own and service and thereby increased our revenue and operating income beginning April 1, 2001. RESULTS OF OPERATIONS PERIOD ENDED MARCH 31, 2001 COMPARED TO THE PERIOD ENDED MARCH 31, 2002
NATURAL GAS ROTARY NGE GREAT LAKES SERVICES GAS LEASING COMPRESSION(1) GROUP TOTAL -------- -------- -------------- ----------- -------- (IN THOUSANDS) THREE MONTHS ENDED MARCH 31, 2001 Revenue $ 1,067 $ 343 $ $ $ 1,410 Gross margin 327 253 580 Gross margin percentage 31% 74% 41% Selling, general and administrative expense 235 34 96 365 Depreciation and amortization expense 25 53 28 106 Interest expense 1 89 8 98 Other income 1 59 60 Equity in earnings from joint venture 6 6 Income tax 27 27 Net Income $ 67 $ 142 $ (159) $ 50 THREE MONTHS ENDED MARCH 31, 2002 Revenue $ 867 $ 499 $ 1,324 $ $ 2,690 Gross margin 246 362 402 1,010 Gross margin percentage 28% 73% 30% 38% Selling, general and administrative expense 199 38 61 101 399 Depreciation and amortization expense 29 86 130 9 254 Interest expense 2 89 157 9 257 Other income 1 1 2 Equity in earnings from joint venture 83 83 Income tax 89 89 Net income $ 17 $ 233 $ 54 $ (208) $ 96
- ---------- (1) We purchased the compression related assets of Great Lakes from Dominion Michigan on March 29, 2001. Therefore, the information for the period ending March 31, 2001, is not included. Rotary Gas Systems Operations Revenue from outside sources decreased approximately $200,000 or approximately 19% for the period ended March 31, 2002 compared to the period ended March 31, 2001. Because our products are custom-built, fluctuations in revenue from outside sources are expected. Our main focus is to build our rental fleet and associated lease revenue in NGE Leasing, which in the long term is more profitable and has a more stable cash flow. For the period ended March 31, 2001, approximately 24% of our plant output was used to build gas compressors for NGE Leasing as opposed to approximately 62% for the same period in 2002. Our focus from a management and sales prospective is to achieve a balance of 70%-30% ratio of leased natural gas compressors to outside sales. We feel that our plant capacity is achievable in the foreseeable future by adding personnel and using the Great Lakes Compression facility if an overrun occurs. The gross margin percentage decreased from 31% for the period ended March 31, 2001, to 28% for the period ended March 31, 2002. The slight decrease resulted mainly from some change in product mix. A greater part of 24 sales during the period ending March 31, 2002, included compressors which normally have a lower margin than flare tips, parts or service associated with rebuilding gas compressors. At times even the margin on individual compressors can vary since they are normally custom designed and manufactured. Selling, general and administrative expense decreased from $235,000 to $199,000 or 15% for the three months ended March 31, 2001, as compared to the same period ended March 31, 2002. This was the result of reduced selling expense related to the decision to discontinue the air compressor line. We discontinued this line of product in the development stage so that we could concentrate on our main product, gas compression. Depreciation expense increased 16% from $25,000 to $29,000 for the three months ended March 31, 2001, compared to the three months ended March 31, 2002. This increase was mainly due to the purchase of additional vehicles, shop and office equipment. There was less than a 1% increase in interest expense mainly due from financing the purchase of additional vehicles. There was no increase in other income. NGE Leasing Operations Revenue from rental of natural gas compressors increased 45% for the period ended March 31, 2002, compared to the same period in 2001. This increase is the result of the increase in our rental fleet of which 24 new compressors were added during the three months ended March 31, 2002, as compared to the addition of five during the 2001 period. The compressors were manufactured by Rotary Gas Systems. The gross margin percentage decreased 1% from 74% for the period ending March 31, 2001 to 73% for the same period in 2002. The cost of revenue is comprised mainly of expenses associated with the maintenance of the gas compressor rental activity. This increase resulted from the fact that the cost of the equipment maintenance will naturally increase over time as the equipment ages. The expected life of a gas compressor unit will exceed 15 years with routine maintenance and a major overhaul every three to four years. As of March 31, 2002, 43% of our compressor rental fleet was less than one year old, 23% was one to two years old, 20% was two to three years old, and 14% was older than three years. Selling, general and administrative expense increased from $34,000 to $38,000 or 12% for the three months ended March 31, 2001, as compared to the same period ended March 31, 2002. This was mainly the result of increased sales commissions. Depreciation expense increased 62% from $53,000 to $86,000 for the three months ended March 31, 2001, compared to the three months ended March 31, 2002. This increase was the result of new gas compressor rental units being added to the fleet from March 31, 2001, until March 31, 2002. There was no increase in interest expense mainly as a result of additional equity funding that occurred in the year from March 31, 2001, until March 31, 2002. Equity in earnings from joint venture increased 1283% from $6,000 to $83,000 during the three months ended March 31, 2001, compared to the same period ended March 31, 2002. This is a joint venture, called Hy-Bon Rotary Compression, LLC, that serves a mutual area of interest in which we contribute gas compressor units for rental. The increase is due to net profits associated with the additional units leased in 2002 as compared to those in 2001. As of March 31, 2002, we had contributed 26 gas compressors to the joint venture. Great Lakes Compression We acquired the compression related assets of Great Lakes Compression from Dominion Michigan as of March 29, 2001. Therefore, there is no historical comparative data for the three months ended March 31, 2001. Natural Gas Services Group Selling, general and administrative expense increased from $96,000 to $101,000 or 5% for the three months ended March 31, 2001, as compared to the same period ended March 31, 2002. This was mainly the result of an increase in consulting fees. Amortization expense decreased from $28,000 to $9,000 or 68% for the three months ended March 31, 2001 compared to the three months ended March 31, 2002. This decrease was the result of changes in the accounting method for amortizing goodwill. Interest expense increased from $8,000 to $9,000 or 13% for the three months ended March 31, 2001 compared to the same period ended March 31, 2002. This increase was the result of financing the purchase on two new vehicles. Income tax expense is accounted on a consolidated basis. Therefore, the tax for all companies is included in the tax expense for Natural Gas Services Group. Income tax expense increased 230% from $27,000 to $89,000 for the three months ended March 31, 2001 compared to same period ended March 31, 2002. This increase is mainly due to an increase in income before taxes. FISCAL YEAR ENDED DECEMBER 31, 2000 COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 2001
NATURAL ROTARY NGE GREAT LAKES GAS SERVICES GAS LEASING COMPRESSION(1) GROUP TOTAL -------- -------- -------------- ------------- ------- (IN THOUSANDS) TWELVE MONTHS ENDED DECEMBER 31, 2000 Revenue $ 2,576 $ 1,076 $ $ $3,652 Gross margin 1,291 826 2,117 Gross margin percentage 50% 77% 58% Selling, general and administrative expense 900 185 153 1,238 Depreciation and amortization expense 91 163 102 356 Interest expense 7 194 6 207 Other income (expense) 13 33 (16) 30 Equity in earnings from joint venture 18 18 Income tax 147 147 Net Income before discontinued operations $ 306 $ 335 $ $ (424) $ 217 TWELVE MONTHS ENDED DECEMBER 31, 2001 Revenue $ 3,841 $ 1,519 $ 3,402 $ $8,762 Gross margin 1,231 1,076 1,513 3,820 Gross margin percentage 32% 71% 47% 45% Selling, general and administrative expense 962 234 297 225 1,718 Depreciation and amortization expense 104 252 423 124 903 Interest expense 4 395 489 36 924 Other income 19 130 3 45 197 Equity in earnings from joint venture 224 224 Income tax 314 314 Net income $ 180 $ 549 $ 307 $ (654) $ 382
25 - ---------- (1) We purchased the compression related assets of Great Lakes from Dominion Michigan on March 29, 2001. Therefore, the information for the year ended December 31, 2000, is not included. Rotary Gas Systems Operations Revenue increased approximately $1,265,000 or approximately 49% for the twelve months ended December 31, 2001 as compared to the same period for 2000. This increase resulted from our increased marketing efforts and funding as well as from increased recognition in the marketplace of our name and products. The gross margin percentage decreased from 50% for the twelve months ended December 31, 2000 to 32% for the same period in 2001. This decrease was the result of several factors, such as (1) in 2000 the product mix included higher margin items such as flares, parts and service, (2) in 2001 the cost of revenue included additional costs for increased support personnel and supervision, intended to increase our production capability for 2001 and beyond, and (3) in 2001 we had increased expenses attributable to our work on development of several new product lines, including larger horsepower gas compressors for third party customers. Selling, general and administrative expense increased 7% from $900,000 to $962,000 for the year ended December 31, 2000, as compared to the same period ended December 31, 2001. This was the result of increased wages, audit fees and various other expense associated with financing transactions and increased volume of sales. Depreciation expense increased 14% from $91,000 to $104,000 for the year ended December 31, 2001. this increase was mainly due to the purchase of additional vehicles, shop and office equipment. Interest expense decreased 43% from $7,000 to $4,000 for the year ended December 31, 2001, compared to the same period ended December 31, 2000. This was mainly due to the pay off of certain auto loans. Other income increased 46% from $13,000 to $19,000 for the year ended December 31, 2000, compared to the same period ended December 31, 2001. This increase resulted from the sale of used vehicles. NGE Leasing Operations Revenue from rental of natural gas compressors increased 42% for the period ended December 31, 2001 as compared to the same period in 2000. This increase resulted from the addition of 40 new gas compressors to the rental fleet during the twelve months ended December 31, 2001 as compared to 34 in operation in 2000. These compressors were manufactured by Rotary Gas Systems. The gross margin percentage decreased 6% from 77% for the period ending December 31, 2000 to 71% for the same period in 2001. The cost of revenue is comprised primarily of expenses associated with the maintenance and repair of the gas compressors. This decrease in gross margin resulted from the fact that the cost of maintenance and repair will naturally increase over time as the equipment ages. As of December 31, 2001, 36% of our compressor rental fleet was less than a year old, 28% was one to two years old, 27% was two to three years old and 9% was older than three years. Selling, general and administrative expense increased from $185,000 to $234,000 or 26% for the year ended December 31, 2000 as compared to the same period ended December 31, 2001. This was mainly the result of increased sales commissions reflecting increased rental activity for the period. Depreciation expense increased 55% from $163,000 to $252,000 for the year ended December 31, 2000, compared to the year ended December 31, 2001. This increase was the result of new gas compressor rental units being added to the fleet. Interest expense increased 104% from $194,000 to $395,000 for the year ended December 31, 2000, compared to the year ended December 31, 2001. This increase is the result of the additional debt that was required to build additional rental compressors. Equity in earnings from joint venture increased 1144% from $18,000 to $224,000 for the year ended December 31, 2000, compared to the same period ended December 31, 2001. This is a joint venture, called Hy-Bon Rotary Compression, LLC, which serves a mutual area of interest in which we contribute gas compressor units for rental. The increase is due to net profits associated with the additional units leased in 2001 as compared to those in 2000. As of December 31, 2001, we had contributed 19 gas compressors to the joint venture, an increase of 14 units from the comparative period. Great Lakes Compression We acquired the compression related assets of Great Lakes from Dominion Michigan as of March 29, 2001. Therefore, no historical comparative data is included. Natural Gas Services Group Selling, general and administrative expense increased from $153,000 to $225,000 or 47% for the year ended December 31, 2000 as compared to the same period ended December 31, 2001. This was mainly the result of an increase in administrative salaries and in audit fees. Depreciation expense increased from $102,000 to $124,000 or 22% for the year ended December 31, 2000 compared to the same period ended December 31, 2001. This increase was the result of the purchase of four new service trucks. Interest expense increased from $6,000 to $36,000 or 500% for the year ended December 31, 2000 compared to the same period ended December 31, 2001. This increase was the result of the financing for the purchase of four new service trucks in June of 2001 and for the purchase of our production facility in October 2000. Income tax expense is accounted for on a consolidated basis therefore the tax for all companies is included in the tax expense for Natural Gas Services Group. Income tax expense increased 114% from $147,000 to $314,000 for the year ended December 31, 2000 compared to the same period ended December 31, 2001. This increase is the result of an increase in income before taxes. 26 CRITICAL ACCOUNTING POLICIES We have identified the policies below as critical to our business operations and the understanding of our results of operations. In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our financial statements in conformity with accounting principles generally accepted in the United States. Actual results could differ significantly from those estimates under different assumptions and conditions. We believe that the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require our most difficult, subjective, and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies are as follows: o revenue recognition; o estimating the allowance for doubtful accounts; o accounting for income taxes; o valuation of long-lived and intangible assets and goodwill; and o valuation of inventory Revenue recognition We recognize revenue from sales of compressors or flare systems at the time of shipment and passage of title when collectability is reasonably assured. We also offer certain of our customers the right to return products that do not function properly within a limited time after delivery. We continuously monitor and track such product returns and we record a provision for the estimated amount of such future returns, based on historical experience and any notification we receive of pending returns. While such returns have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same return rates that we have in the past. Any significant increase in product failure rates and the resulting credit returns could have a material adverse impact on our operating results for the period or periods in which such returns occur. When product is billed to customers based on contractual agreements, but has not yet been shipped, payments are recorded as deferred revenue, pending shipment. Rental and lease revenue are recognized over the terms of the respective lease agreements based upon the classification of the lease. Allowance for doubtful accounts receivable We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer's current credit worthiness, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Since our accounts receivable are concentrated in approximately 81 customers at March 31, 2002, a significant change in the liquidity or financial position of any one of these customers could have a material adverse impact on the collectability of our accounts receivables and our future operating results. 27 Accounting for income taxes. As part of the process of preparing our consolidated financial statements we are required to estimate our Federal income taxes as well as income taxes in each of the states in which we operate. This process involves us estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense in the tax provision in the statement of operations. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. Valuation of long-lived and intangible assets and goodwill. We assess the impairment of identifiable intangibles, long-lived assets and related goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include the following: o significant underperformance relative to expected historical or projected future operating results; o significant changes in the manner of our use of the acquired assets or the strategy for our overall business; and o significant negative industry or economic trends; When we determine that the carrying value of intangibles, long-lived assets and related goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure any impairment based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model. In 2002, Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" became effective and as a result, we ceased to amortize approximately $2.6 million of goodwill as of January 1, 2002. In lieu of amortization, we are required to perform an initial impairment review of our goodwill in 2002 and an annual impairment review thereafter. Based upon a valuation we obtained in July 2002 of our reporting units with goodwill, we do not expect to record an impairment charge during 2002. Inventories We value our inventory at the lower of the actual cost to purchase and/or manufacture the inventory or the current estimated market value of the inventory. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated forecast of product demand and production requirements. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets . SFAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for under the purchase method. For all business combinations for which the date of acquisition is after June 30, 2001, SFAS 141 also establishes specific criteria for the recognition of intangible assets separately from goodwill and requires unallocated negative goodwill to be written off immediately as an extraordinary gain, rather than deferred and amortized. SFAS 142 changes the accounting for goodwill and other intangible assets after an acquisition. 28 The most significant changes made by SFAS 142 are: 1) goodwill and intangible assets with indefinite lives will no longer be amortized; 2) goodwill and intangible assets with indefinite lives must be tested for impairment at least annually; and 3) the amortization period for intangible assets with finite lives will no longer be limited to forty years. We do not believe that the adoption of SFAS 141 or SFAS 142 will have a material effect on our financial position, results of operations, or cash flows. In June 2001, the FASB also approved for issuance SFAS 143, Asset Retirement Obligations. SFAS 143 establishes accounting requirements for retirement obligations associated with tangible long-lived assets, including 1) the timing of the liability recognition, 2) initial measurement of the liability, 3) allocation of asset retirement cost to expense, 4) subsequent measurement of the liability and 5) financial statement disclosures. SFAS 143 requires that an asset retirement cost should be capitalized as part of the cost of the related long-lived asset and subsequently allocated to expense using a systematic and rational method. We will adopt the statement effective no later than January 1, 2003, as required. The transition adjustment resulting from the adoption of SFAS 143 will be reported as a cumulative effect of a change in accounting principle. We do not believe that the adoption of this statement will have a material effect on its financial position, results of operations, or cash flows. See Note 15 to the financial statements filed with this prospectus. In October 2001, the FASB approved SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144 replaces SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The new accounting model for long-lived assets to be disposed of by sale applies to all long-lived assets, including discontinued operations, and replaces the provisions of APB Opinion No. 30, Reporting Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, for the disposal of segments of a business. Statement 144 requires that those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. Statement 144 also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The provisions of Statement 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, are to be applied prospectively. Presently, we do not believe the adoption of this statement will have a material effect on our financial position, results of operations, or cash flows. SEASONALITY AND ECONOMIC CONDITIONS Our sales are affected by the timing of planned development and construction projects by energy industry customers. The fourth quarter is generally favorably affected. INFLATION We do not believe that inflation had a material impact upon our results of operations during the three months ended March 31, 2002, or during the years ended December 31, 2001 and 2000. LIQUIDITY AND CAPITAL RESOURCES We have funded our operations through private offerings of our common and preferred stock, subordinated debt, bank debt and seller debt in our acquisition of the compression related assets of Dominion Michigan. Proceeds were primarily used to fund the manufacture and fabrication of additional units for our rental fleet of gas compressors and to help fund the cash portion of the payment for the compression related assets of Dominion Michigan during the first quarter of 2001. 29 At March 31, 2002, we had cash of approximately $136,000, a working capital deficit of approximately $6,300,000 and debt of approximately $9,700,000 of which approximately $7,800,000 was classified as current. We had approximately $78,000 of negative net cash flow from operating activities during the first three months of 2002. This was primarily due to income from continuing operations before tax of approximately $185,000 plus depreciation and amortization of approximately $254,000, for a total of approximately $439,000, offset by increases in inventory and receivables. We realized approximately $840,000 of net cash flow from operating activities during the twelve months ended December 31, 2001. This was primarily due to income from continuing operations before tax of approximately $696,000 plus depreciation and amortization of approximately $903,000, for a total of approximately $1,599,000, offset by increases in inventory and receivables. Upon completion of this offering, we intend to actively pursue adding gas compressors to our rental fleet and seeking acquisitions. No specific candidates have yet been identified. We expect to fund additional rental units though borrowings and cash flow from operations. We believe that the revenue generated by our operations and the proceeds from this offering will be adequate to meet our anticipated cash, capital and debt service requirements for approximately twelve months following this offering. Maturities of long-term debt based on contractual requirements for the years ending December 31, are as follows: 2002 $ 904,000 2003 7,624,000 2004 698,000 2005 309,000 2006 195,000 Thereafter 222,000 ----------- $ 9,952,000 ===========
Through the end of December 2002, we will need approximately $1,751,000 to service the principal and interest payments that will be due on our current debt. The approximately $1,751,000 includes approximately $154,000 of interest that will be due on December 31, 2002, on notes we sold in a private offering in 2000 and 2001. If we do not have sufficient cash flow to cover the principal and interest payments, we will not be able to pay the quarterly dividends on our outstanding preferred stock. In this regard, until Dominion Michigan is paid in full, we currently are not able to use any cash flow from the operations of Dominion Michigan to pay the principal and interest payments or dividends. As a result of the issuance of warrants with an exercise price of $3.25 per share in April 2002 in connection with guaranteeing debt, we expect to incur a transaction expense of approximately $45,000 to $50,000 during our second three months ending June 30, 2002. MARKET RISK We significantly rely upon debt financing provided by various financial institutions. Most of these instruments contain interest provisions that are at least a percentage point above the published prime rate. This creates a vulnerability to us relative to the movement of the prime rate. Should the prime rate increase, our cost of funds will increase and affect our ability to obtain additional debt. We have not engaged in any hedging activities to offset such risks. 30 BUSINESS OVERVIEW We were incorporated on December 17, 1998. In early 1999, we underwent a reorganization by acquiring CNG Engines Company, Flare King, Inc., Hi-Tech Compressor Company, L.C. and NGE Leasing, Inc. In March 2000, we sold CNG back to its former principal owner. In July 2000, Flare King and Hi-Tech merged and now operate as Rotary Gas Systems, Inc. On March 29, 2001, we acquired, through our subsidiary, Great Lakes Compression, Inc., all of the compression related assets of Dominion Michigan Petroleum Services, Inc., a company that was in the business of manufacturing, fabricating, selling, leasing and maintaining natural gas compressors and related equipment. We now operate through our three subsidiaries, Rotary Gas, NGE Leasing and Great Lakes Compression and through one joint venture, HyBon Rotary. Our principal executive offices are located at 2911 South County Road 1260, Midland, Texas 79706 and our telephone number is (915) 563-3974. ACQUISITION OF COMPRESSION RELATED ASSETS OF DOMINION MICHIGAN On March 29, 2001, we acquired the compression related assets of Dominion Michigan, which is a subsidiary of Dominion Exploration, Inc., for a total of $8,000,000. The purchase price was reduced by approximately $43,600 which was the net cash generated from the assets acquired from January 1, 2001 to the date of closing. In consideration for the assets, we paid Dominion Michigan $1,000,000 and are obligated to pay an additional approximately $7,000,000 in March, 2003. The deferred purchase price bears interest at a rate of nine percent per annum, which is payable on the first business day of each month. The deferred purchase price is secured by all of the assets we acquired and the pledge of all of our stock ownership in our subsidiary that acquired the assets. The assets acquired consisted of approximately five acres of land, fabrication and storage facilities, equipment and 93 compressors that are leased. Of the 93 compressors, 35 are leased to Dominion Michigan and its affiliates and 58 are leased month-to-month to other parties. We also assumed six leases of compressors and maintenance agreements for 77 other compressors. Further, as a part of the transaction, Dominion Exploration & Production, Inc., an affiliate of Dominion Michigan, committed to purchase or enter into five year leases for compressors totaling five thousand horsepower. The purchases or leases are to be made by December 31, 2005, and the compressors will be sold or leased by us at our normal rates. Dominion Exploration has agreed that no more than 30% of the compressors will be purchased and that 70% (or more at its option) will be leased. Dominion Exploration is required to order compressors, either for purchase or lease totaling not less than 800 horsepower and not more than 1300 horsepower during each calendar year. The number of compressor units and the size and type of each compressor unit will be determined solely by Dominion Exploration. As of March 31, 2002, the affiliate had purchased or leased compressors totaling 1,830 horsepower and was in compliance with its agreement. Until we have paid the deferred purchase price, our subsidiary is limited in the amount of debt and liens it may have, restricted from consolidating or merging with or into any other entity or selling or otherwise transferring all or any substantial part of its assets to any other person, is prohibited from paying dividends, is limited in making investments and is limited in making capital expenditures. 31 OUR BUSINESS The compression business of our predecessors was formed in 1984 to take advantage of the concept of packaging a rotary screw compressor thereby making available lower cost compression for marginal wells. We are involved in the manufacture, fabrication, sale, lease, and maintenance of compressors and the manufacture and sale of natural gas flare systems, components and ignition systems. We have manufacturing and fabrication facilities located in Lewiston, Michigan, and Midland, Texas, where we manufacture and fabricate natural gas compressors. We design and manufacture natural gas flare systems, components and ignition systems in our facility in Midland, Texas, for use in oilfield, refinery and petrochemical plant applications. We currently provide our products and services to a customer base of oil and gas exploration and production companies operating primarily in Colorado, Kansas, Louisiana, Michigan, New Mexico, Oklahoma, Texas and Wyoming. INDUSTRY BACKGROUND Our products and services are related to the oil and natural gas industries. The oil and natural gas industry is comprised of several large, well-capitalized companies accounting for the majority of the market. There also exist a large number of small privately held companies making up the remainder of the market. According to a report by the National Petroleum Council in December 1999, there is a growing consumption of natural gas in this country. We believe that there will continue to be a growing demand for natural gas. Because of this, demand for our products and services is expected to continue to rise as a result of: o the increasing demand for energy, both domestically and abroad; o environmental considerations which provide strong incentives to use natural gas in place of other carbon fuels; o the cost savings of using natural gas rather than electricity for heat generation; o implementation of international environmental and conservation laws; o the aging of producing natural gas reserves worldwide; and o the extensive supply of undeveloped natural gas reserves. By using a compressor, the operator of a natural gas well is able to increase the pressure of natural gas from a well to make it economically viable by enabling gas to continue to flow in the pipeline to its destination. We feel that we are well positioned through our gas compression and flare system activities to take advantage of the aging of reserves and the development of new reserves. THE COMPRESSION BUSINESS Natural gas compressors are used in a number of applications intended to enhance the productivity of oil and gas wells, gas transportation lines and processing plants. Compression equipment is often required to boost a well's production to economically viable levels and enable gas to continue to flow in the pipeline to its destination. We believe that most producing gas wells in North America, at some point, will utilize compression. As of December 31, 2000, the Energy Information Administration reported that there were approximately 306,000 producing gas and gas condensate wells in the United States. The states where we currently operate account for approximately 166,000 of these wells. 32 THE LEASING BUSINESS We primarily lease natural gas compressors. As of March 31, 2002, we had 220 natural gas compressors totaling approximately 27,000 horsepower leased to 23 third parties, compared to 73 natural gas compressors totaling approximately 6,400 horsepower leased to nine third parties at March 31, 2001. Of the 220 natural gas compressors, 44 were leased to Dominion Michigan and its affiliates. As a part of our leasing business, in 2000 we formed a limited liability company, Hy-Bon Rotary Compression LLC, ("HBRC") with Hy-Bon Engineering Company, Inc., a non-affiliated company to lease natural gas compressors. We formed HBRC to lease compressors to a customer with which the non-affiliated company had a relationship. The non-affiliated company owns 50% and we own 50% of HBRC. The non-affiliated company has appointed a majority of the persons who serve as managers of HBRC. As of March 31, 2002, we had contributed 26 compressors totaling approximately 2,100 horsepower to HBRC and the non-affiliated company had contributed 26 compressors totaling approximately 2,300 horsepower to HBRC. We split the expenses of HBRC with the other company. After the payment of expenses, we receive whatever profit is realized by HBRC in proportion to the amount received by HBRC from the lease of natural gas compressors that are contributed by us and by the non-affiliated company to HBRC. In addition to 81 separate written maintenance agreements that we had at March 31, 2002, we provide maintenance as a part of the rental in our compressor leases. Many companies and individuals are turning to leasing of equipment instead of purchasing. Leasing does not require the purchaser to make large capital expenditures for new equipment or to obtain financing through a lending institution. This frees the customer's assets for developing the customer's business. Our leases generally have initial terms of from six to 18 months and then continue on a month-to-month basis. The leases with Dominion Exploration have an initial five year term. Lease rentals are paid monthly. At the end of a lease term, the customer may continue to pay monthly rentals on the equipment, or we may require them to purchase it or return it to us. Changing well and pipeline pressures and conditions over the life of a well often require producers to reconfigure their compressor units to optimize the well production or pipeline efficiency. Because the equipment is highly technical, a trained staff of field service personnel, a substantial parts inventory and a diversified fleet of natural gas compressors are often necessary to perform reconfiguration functions in an economic manner. It is not efficient or, in many cases, economically possible for independent natural gas producers to maintain reconfiguration capabilities individually. Also, our management believes that, in order to streamline their operations and reduce their capital expenditures and other costs, a number of major oil and gas companies have sold portions of their domestic energy reserves to independent energy producers and have outsourced many facets of their operations. We believe that these initiatives are likely to contribute to increased rental of compressor equipment. For that reason, we have created our own compressor-rental fleet to take advantage of the rental market, and intend to expand our fleet by approximately 120 natural gas compressors over the next 12 months through the proceeds of this offering and cash flow. The size, type and geographic diversity of our rental fleet enables us to provide our customers with a range of compression units that can serve a wide variety of applications, and to select the correct equipment for the job, rather than the customer trying to fit the job to its own equipment. We base our gas compressor rental rates on several factors, including the cost and size of the equipment, the type and complexity of service desired by the customer, the length of contract, and the inclusion of any other services desired, such as leasing, installation, transportation and daily operation. CUSTOM FABRICATION We also engineer and fabricate natural gas compressors for our customers to meet their unique specifications based on well pressure, production characteristics and the particular applications for which 33 compression is sought. In order to meet the ongoing needs of our customers for whom we custom fabricate, we offer a variety of services, including: (i) engineering, manufacturing and fabrication of the compressors; (ii) installation and testing of compressors; (iii) ongoing performance review to assess the need for a change in compression: and (iv) periodic maintenance and parts replacement. We receive revenue for each service. MAINTENANCE Although natural gas compressors generally do not suffer significant technological obsolescence, they do require routine maintenance and periodic refurbishing to prolong their useful life. Routine maintenance includes alignment and compression checks and other parametric checks indicate a change in the condition of the compressors. In addition, oil and wear-particle analysis is performed on all compressors. Overhauls are done on a condition-based interval or a time-based schedule. Based on our past experience, these maintenance procedures maximize component life and unit availability and minimize downtime. As of March 31, 2002, we had written maintenance agreements with third parties relating to 81 compressors. Each written maintenance agreement has four years left on its term and expires on December 31, 2005. During our year ended December 31, 2001, and the three months ended March 31, 2002, we received revenue of approximately $704,000 (approximately 8% of our total consolidated revenue) and $265,000 (approximately 10% of our total consolidated revenue), respectively, from maintenance agreements. EXCHANGE AND REBUILD PROGRAM We have established an exchange and rebuild program to attempt to help minimize costs and maximize our customers' revenue. This program is designed for operations with rotary screw compressors where downtime and lost revenue are critical. Under the program, we work with our customer's maintenance and operating personnel to identify and quantify equipment for exchange. When we receive a compressor for exchange due to a problem with the compressor, we deliver to our customer a replacement compressor at full price. We then rebuild the exchange compressor and credit our customer with an amount based on the value of the compressor we rebuild. This program enables our customers to obtain replacement compressors and shorten the time that the customer is unable to realize gas production from one or more wells because of the lack of a compressor. During our year ended December 31, 2001, and the three months ended March 31, 2002, we received revenue of approximately $402,000 (approximately 5% of our total consolidated revenue) and approximately $67,000 (approximately 2% of our total consolidated revenue), respectively, from exchanging and rebuilding rotary screw compressors for our customers. RETROFITTING SERVICE We recognize the capital invested by our customers in compressors. We also recognize that producing wells and gas gathering systems change significantly during their operating life. To meet these changing conditions and help our customers maximize their operating income, we offer a retrofitting service by repackaging a customer's compressor with a compressor that meets our customer's changed conditions. THE FLARE BUSINESS The drilling for and production of oil and gas results in certain gaseous hydrocarbon byproducts that generally must be burned off at the source. Although flares and flare systems have been part of the oilfield and petrochemical environment for many years, increasing regulation of emissions has resulted in a significant increase in demand for flare systems of increasingly complex design meeting new environmental regulations. Growth is primarily related, as is the case for most industries connected with oil and gas, to the price of oil and gas and new environmental regulations. 34 We design, manufacture, install and service flare stacks and related ignition and control devices for the onshore and offshore burning of gas compounds such as hydrogen sulfide, carbon dioxide, natural gas and liquefied petroleum gases. We produce two ignition systems for varied applications: (a) a standing jet-like pipe for minimal fuel consumption, with a patented electronic igniter; and (b) an electronic sparked ignition system. Flare tips are available in carbon steel as well as many grades of stainless steel alloys. The stacks can be free standing, guyed, or trailer mounted. The flare stack and ignition systems use a smokeless design for reduced emissions to meet or exceed government regulated clean air standards. Our product line includes solar-powered flare ignition systems and thermocouple control systems designed to detect the loss of combustion in the product stream and reignite the product stream. These products contain specially-designed combustion tips and utilize pilot flow Venturi tubes to maximize the efficient burning of waste gas with a minimal use of pilot or assist gas, thereby minimizing the impact on the environment of the residual output. Increased emphasis on "clean air" and industry emissions has had a positive effect on the flare industry. Our broad energy industry experience has allowed us to work closely with our customers to seek cost-effective solutions to their flare requirements. During the year ended December 31, 2001, and the three months ended March 31, 2002, we sold 54 and 10 flare systems. respectively, to our customers generating approximately $703,000 (approximately 8% of our total consolidated revenue) and $275,000 (approximately 10% of our total consolidated revenue) in revenue, respectively. MAJOR CUSTOMERS During our year ended December 31, 2001, sales to one customer amounted to approximately 26% and during our year ended December 31, 2000, sales to one customer amounted to approximately 12% of our consolidated revenue. No other single customer accounted for more than 10% of our revenue in either of those two years. During the three months ended March 31, 2002, sales to one customer amounted to approximately 34% of our consolidated revenue and during the three months ended March 31, 2001, sales to one customer amounted to approximately 13% of our consolidated revenue. No other single customer accounted for more than 10% of our revenue during these periods. BACKLOG We had a backlog of approximately $54,000 as of March 31, 2002 as compared to approximately $636,000 as of the same date in 2001. The reduced backlog at March 31, 2002 results from us having more compressors being built for leasing rather than for sale. At March 31, 2001, our backlog included a number of compressors that were being built for sale. Backlog consists of firm customer orders for which a purchase order has been received, satisfactory credit or a financing arrangement exists, and delivery is scheduled. Our backlog at March 31, 2002, includes only sales to outside third parties and does not include the backlog that we may receive from the lease or sale of compressors over the next four years to Dominion Exploration. CONTINUING PRODUCT DEVELOPMENT We engage in a continuing effort to improve our compressor and flare operations. Continuing development activities in this regard include new and existing product development testing and analysis, process and equipment development and testing, and product performance improvement. We also focus our activities on reducing overall costs to the customer, which include the initial capital cost for equipment, the monthly leasing cost if applicable, and the operating costs associated with such equipment, including energy consumption, maintenance costs and environmental emissions. During our years ended December 31, 2001, and December 31, 2000, we did not spend any material amounts on research and development activities. Rather, product improvements were made as a part of our normal operating activities. SALES AND MARKETING General. We conduct our operations from two locations. These locations, with exception of our executive offices, maintain an inventory for local customer requirements, trained service technicians, and 35 manufacturing capabilities to provide quick delivery and service for our customers. Our sales force also operates out of these locations and focuses on communication with our customers and potential customers through frequent direct contact, technical assistance, print literature, direct mail and referrals. Our sales and marketing is performed by 6 employees. Additionally, our personnel coordinate with each other to develop relationships with customers who operate in multiple regions. Our sales personnel maintain intensive contact with our operations personnel in order to promptly respond to and address customer needs. Our overall sales efforts concentrate on demonstrating our commitment to enhancing the customer's cash flow through enhanced product design, fabrication, manufacturing, installation, customer service and support. During the years ended December 31, 2001 and 2000, we spent approximately $56,000 and approximately $12,000, respectively, on advertising. During the three months ended March 31, 2002 and 2001, we spent approximately $9,000 and approximately $11,000, respectively, on advertising. Compression Activity. The compression marketing program emphasizes our ability to design and fabricate natural gas compressors in accordance with the customer's unique specifications and to provide all necessary service for such compressors. Flare Systems Activity. The flare systems marketing program emphasizes our ability to design, manufacture, install and service flares with the updated technology. COMPETITION Compression Activity. The natural gas compression business is competitive. We experience competition from companies with greater financial resources. On a regional basis, we experience competition from several smaller companies that compete directly with us. We have a number of competitors in the natural gas compression segment, but we do not have sufficient information to determine our competitive position within that group. We believe that we compete effectively on the basis of price, customer service, including the ability to place personnel in remote locations, flexibility in meeting customer needs and quality and reliability of our compressors and related services. Compressor industry participants can achieve significant advantages through increased size and geographic breadth. As the number of rental compressors in our rental fleet increases, the number of sales, support, and maintenance personnel required and the minimum level of inventory does not increase commensurately. As a result of economies of scale, we believe that we, with a growing rental fleet, have relatively lower operating costs and higher margins than smaller companies. Flare Systems Activity. The flare business is highly competitive. We have a number of competitors in the flare systems segment, but we do not have sufficient information to determine our competitive position within that group. We believe that we are able to compete by our offering products specifically engineered for the customer's needs. PROPERTIES We maintain our executive offices in Midland, Texas. This facility is owned by us and is used for manufacturing, fabrication, remanufacturing, operations, testing, warehousing and storage, general and administrative functions and training. Prior to September 2000 the facility was leased. The aggregate rental expense was approximately $33,000 in 2000. We purchased the building and land in September 2000 for approximately $329,000 (which includes closing costs) from an unaffiliated party. 36 The facility in Midland is an approximately 24,600 square foot building that provides us with sufficient space to manufacture, fabricate and test our equipment on site and has land available to expand the building when needed. Our current facilities in Midland are anticipated to provide us with sufficient space and capacity for at least the next year and thus there are no current plans to open new locations, unless they are acquired as a result of any future acquisitions. The facilities in Lewiston, Michigan consist of a total of approximately 15,360 square feet. Approximately 9,360 square feet are used as offices and a repair shop and approximately 6,000 square feet are used for manufacturing and fabrication of compressors and storage. We also own an approximate 4,100 square foot building in Midland that is leased at a current rate of $1,000 per month to an unaffiliated party pursuant to a lease that terminates in May 2005. This facility previously contained our executive offices and manufacturing and fabrication operations. We believe that our properties are generally well maintained and in good condition. LIABILITY AND OTHER INSURANCE COVERAGE Our equipment and services are provided to customers who are subject to hazards inherent in the oil and gas industry, such as blowouts, explosions, craterings, fires, and oil spills. We maintain liability insurance that we believe is customary in the industry. We also maintain insurance with respect to our facilities. Based on our historical experience, we believe that our insurance coverage is adequate. GOVERNMENT REGULATION We are subject to numerous federal, state and local laws and regulations relating to the storage, handling, emission and discharge of materials to the environment, including the Comprehensive Environmental Response, Compensation and Liability Act, the Clean Water Act, the Clean Air Act and the Resource Conservation and Recovery Act. As a result of our operations, we generate or manage hazardous wastes, such as solvents, thinner, waste paint, waste oil, washdown wastes and sandblast material. We currently spend a negligible amount each year to dispose of the wastes. Although we attempt to identify and address contamination before acquiring properties, and although we attempt to utilize generally accepted operating and disposal practices, hydrocarbons or other wastes may have been disposed of or released on or under properties owned, leased, or operated by us or on or under locations where such wastes have been taken for disposal. These properties and the wastes or remedial sites where they have been released might have to be remediated at our expense. We believe that our existing environmental control procedures are adequate and we have no current plans for substantial operating or capital expenditures relating to environmental control requirements. We believe that we are in substantial compliance with environmental laws and regulations and that the phasing in of emission controls and other known regulatory requirements at the rate currently contemplated by such laws and regulations will not have a material adverse affect on our financial condition or operational results. Some risk of environmental liability and other costs are inherent in the nature of our business, however, and there can be no assurance that environmental costs will not rise. Moreover, it is possible that future developments, such as increasingly strict requirements and environmental laws and enforcement policies thereunder, could lead to material costs of environmental compliance by us. While we may be able to pass on the additional cost of complying with such laws to our customers, there can be no assurance that attempts to do so will be successful. PATENTS, TRADEMARKS AND OTHER INTELLECTUAL PROPERTY We believe that the success of our business depends more on the technical competence, creativity and marketing abilities of our employees than on any individual patent, trademark, or copyright. Nevertheless, as part of our ongoing research, development and manufacturing activities, we have a policy of seeking patents 37 when appropriate on inventions concerning new products and product improvements. We currently own two United States patents covering certain flare system technologies, which expire in May 2006 and in January 2010, respectively. We do not own any foreign patents. Although we continue to use the patented technology and consider it useful in certain applications, we do not consider these patents to be material to our business as a whole. SUPPLIERS AND RAW MATERIALS With respect to our flare system and compressor operations, our raw materials used consist of cast and forged iron and steel. Such materials are generally available from a number of suppliers, and accordingly, we are not dependent on any particular supplier for these new materials. We currently do not have long term contracts with our suppliers of raw materials, but believe our sources of raw materials are reliable and adequate for our needs. We have not experienced any significant supply problems in the past. Certain of our components of our compressors are obtained primarily from two suppliers. If either one of our current major suppliers should curtail its operations or be unable to meet our needs, we would encounter delays in supplying our customers with compressors until an alternative supplier could be found. We may not be able to find acceptable alternative suppliers. EMPLOYEES As of March 31, 2002, we had 71 employees, of which 10 are employed in administration, 5 in sales and marketing, 39 in technical and manufacturing capacities and 17 in field services. All 71 of our employees at March 31, 2002, were employed on a full-time basis. No employees are represented by labor unions and we believe that our relations with our employees are satisfactory. LEGAL PROCEEDINGS There are no pending or, to our knowledge, threatened claims against us. However, from time to time, we expect to be subject to various legal proceedings, all of which are of an ordinary or routine nature and incidental to our operations. Such proceedings have not in the past, and we do not expect they will in the future have, a material impact on our results of operations or financial condition. 38 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The table below contains information about our executive officers and directors:
NAME AGE POSITION ---- --- -------- Wallace O. Sellers(1)(2) 72 Director, Chairman Wayne L. Vinson 43 Director and President Scott W. Sparkman 40 Director and Secretary Charles G. Curtis(1)(2) 69 Director James T. Grigsby(1)(2) 54 Director Alan P. Kurus 48 Vice President - Sales and Marketing Earl R. Wait 58 Chief Financial Officer and Treasurer
- ---------- (1) Member of our audit committee (2) Member of our compensation committee The Board of Directors has been divided into three classes with directors serving staggered three-year terms expiring at the annual meeting of stockholders in 2002, 2003 and 2004, respectively. At each annual meeting of stockholders, one class of directors is elected for a full term of three years to succeed those directors in the class whose term is expiring. With respect to the existing Board of Directors, the terms of Mr. Curtis and Mr. Sellers will expire in 2005, the terms of Mr. Sparkman and Mr. Grigsby will expire in 2003; and the term of Mr. Vinson in 2004. All officers serve at the discretion of the Board of Directors. The following sets forth biographical information for at least the past five years for our directors and executive officers. WALLACE O. SELLERS is one of our founders and has served as a director and the Chairman of our Board of Directors since December 17, 1998, and as the Chairman of the Board of Directors of Great Lakes Compression since February 2001. Although Mr. Sellers retired in December 1994, he served as Vice-Chairman of the Board and Chairman of the Executive Committee of Enhance Financial Services, Inc., a financial guaranty reinsurer, from January 1995 to 2001. From November 1986 to December 1991 he was President and Chief Executive Officer of Enhance. Mr. Sellers serves as a director of Danielson Holding Corp., an insurance holding company which is a reporting company under the Securities Exchange Act of 1934. From 1951 to 1986 Mr. Sellers was employed by Merrill Lynch, Pierce, Fenner & Smith Incorporated, an investment banker, in various capacities, including Director of the Municipal and Corporate Bond Division and Director of the Securities Research Division. Immediately prior to his retirement from Merrill Lynch, he served as Senior Vice President and Director of Strategic Development. Mr. Sellers received a BA degree from the University of New Mexico, an MA degree from New York University and attended the Advanced Management Program at Harvard University. Mr. Sellers is a Chartered Financial Analyst. WAYNE L. VINSON has served as one of our directors since April 2000, as our President since July 2001, as our Executive Vice President from October 31, 2000 to July 2001, as the President of Rotary (and its predecessor, Hi-Tech) since February 1994, as a director of NGE between 1996 and 1998 and as Executive Vice President of Great Lakes Compression since February 2001. He also served as our Vice President from April 2000 to October 2000. From January 1990 to June 1995, Mr. Vinson served as Vice President and since June 1995 he has served as President of Vinson Operating Company, an oil and gas well operator. Mr. Vinson has more than 22 years of experience in the energy services industry. 39 SCOTT W. SPARKMAN has been one of our directors since 1998, has served as Executive Vice-President of NGE since July 2001, has served as a director since December 1998 and as Secretary and Treasurer of NGE since March 1999 and has served as the Secretary of Great Lakes Compression since February 2001. Mr. Sparkman served as the President of NGE from December 1998 to July 2001. From May 1997 to July 1998, Mr. Sparkman served as Project Manager and Comptroller for Business Development Strategies, Inc., a designer of internet websites. Mr. Sparkman pursued personal business interests from May 1996 to May 1997. From February 1991 to May 1996, Mr. Sparkman served as Vice President and Director, later as President and Director, of Diamond S Safety Services, Inc., a seller and servicer of hydrogen sulfide monitoring equipment. Mr. Sparkman filed for personal bankruptcy in 1998 as a result of personal debt created when there was a decline in the need for the oilfield services that were provided by a company that was owned by Mr. Sparkman. He received a BBA degree from Texas A&M University. CHARLES G. CURTIS has been one of our directors since April 2001. Since 1992, Mr. Curtis has been the President and Chief Executive Officer of Curtis One, Inc. d/b/a/ Roll Stair, a manufacturer of aluminum and steel mobile stools and mobile ladders. From 1988 to 1992, Mr. Curtis was the President and Chief Executive Officer of Cramer, Inc. a manufacturer of office furniture. Mr. Curtis has a B.S. degree from the United States Naval Academy and a MSAE degree from the University of Southern California. JAMES T. GRIGSBY has served as one of our directors since 1999 and as one of the directors of Great Lakes Compression since February 2001. Since 1996, Mr. Grigsby has been a director of and a consultant to Blue River Paint Co., a development stage environmental friendly coatings technology company. From 1996 to 1997, Mr. Grigsby was a consultant to Outlook Window Partnership, a regional wood window manufacturer. From 1989 to 1996, Mr. Grigsby was President and Chief Executive Officer of Seal Right Windows, Inc. and Chief Executive Officer of Oldach Window Corp., manufacturers of wood, wood-clad and vinyl windows and doors. Mr. Grigsby received a BS degree from the University of Michigan and an MBA degree from Stanford University. ALAN P. KURUS has served as our Vice President - Sales and Marketing since March 2001 and one of our employees since October 2000. From 1997 to 2000, Mr. Kurus was Vice President - Sales and Marketing of CompAir Americas, a manufacturer of compressors. From 1993 to 1997, Mr. Kurus was the Director of Sales for Le ROI International, a manufacturer of compressors. EARL R. WAIT has served as our Chief Financial Officer since May 2000 and our Treasurer since 1998. Mr. Wait was our Chief Accounting Officer from 1998 to May 2000. Mr. Wait has been the Chief Financial Officer and Secretary/Treasurer of Flare King and then Rotary since April 1993, the Assistant Secretary/Treasurer for Hi-Tech since June 1996, the Controller and Assistant Secretary/Treasurer for Hi-Tech from 1994 to 1999, a director of NGE since July 1999 and the Chief Accounting Officer and Treasurer of Great Lakes Compression since February 2001. Mr. Wait is a certified public accountant with an MBA in management and has more than 25 years of experience in the energy industry. The following sets forth biographical information for at least the past five years for two of our employees whom we consider to be key employees. WALLACE C. SPARKMAN, age 72, is one of our founders and has been the President of NGE since July 2001, a director of NGE since February 1996, the President of Rotary (and its predecessor, Flare King) from April 1993 to April 1997. Mr. Sparkman served as our President from May 2000 to July 2001 and as the President of Great Lakes Compression from February 2001 to July 2001. Mr. Sparkman was Vice President of NGE from February 1996 to November 1999. Since December 1998, Mr. Sparkman has acted as a consultant to our Board of Directors. From 1985 to 1998, Mr. Sparkman acted as a management consultant to various entities and acted as a principal in forming several privately-owned companies. Mr. Sparkman was a co-founder of Sparkman Energy Corporation, a natural gas gathering and transmission company, in 1979 and served as its Chairman of the Board, President and Chief Executive Officer until 1985, when ownership control changed. From 1968 to 1979, Mr. Sparkman held various executive positions and served as a director 40 of Tejas Gas Corporation, a natural gas gathering and transmission company. At the time of his resignation from Tejas Gas Corporation in 1979, Mr. Sparkman was President and Chief Executive Officer. Mr. Sparkman has more than 34 years of experience in the energy service industry. RONALD D. BINGHAM, age 57, has served as the President of Great Lakes Compression since 2001. From March 2001 to July 2001, Mr. Bingham was the General Manager of Great Lakes Compression. From January 1989 to March 2001, Mr. Bingham was the District Manager for Waukesha Pearce Industries, Inc., a distributor of Waukesha natural gas engines. Mr. Bingham is a member of the Michigan Oil and Gas Association and received a bachelors degree in Graphic Arts from Sam Houston State University. All of the officers and key employees devote substantially all of their working time to our business. 41 EXECUTIVE COMPENSATION The following table sets forth information regarding the compensation paid during the years ended December 31, 2001, 2000 and 1999 by us to Wayne L. Vinson and Earl R. Wait, our only executive officers whose combined salary and bonuses exceeded $100,000 during the year ended December 31, 2001, and to Wallace C. Sparkman, who was our chief executive officer until July 25, 2001.
LONG-TERM ANNUAL COMPENSATION COMPENSATION AWARDS NAME -------------------------------------- ----------------------------- PRINCIPAL POSITION YEAR SALARY BONUS SECURITIES UNDERLYING OPTIONS ------------------ ---- --------- -------- ----------------------------- Wayne L. Vinson 2001 $ 102,692 $ 25,583 -0-(1) Executive Vice President 2000 74,423 25,604 -0- until 7/25/01 1999 60,000 47,168 -0- President since 7/25/01 Earl R. Wait 2001 85,385 23,164 -0- Chief Financial Officer 2000 80,088 7,416 -0- 1999 60,000 21,616 -0- Wallace C. Sparkman 2001 98,583(2) -0- 21,467(3) President until 7/25/01 2000 60,750(2) -0- -0- President of NGE since 1999 21,770(2) -0- -0- 7/25/01
- ---------- (1) CAV-RDV, Ltd., a Texas limited partnership for the benefit of the children of Wayne L. Vinson, was issued a five year warrant to purchase 15,756 shares of our common stock at $2.50 per share in consideration for CAV-RDV, Ltd. guaranteeing a portion of our debt. The children are eighteen years old or older and Mr. Vinson is not a partner in CAV-RDV, Ltd. and disclaims beneficial ownership of the warrants. (2) This amount was paid as a management or consulting fee to a corporation in which Mr. Sparkman is the sole shareholder. (3) Wallace C. Sparkman subsequently transferred his warrants for 21,467 shares to Diamond S. DGT, a trust of which Scott W. Sparkman is the trustee and a beneficiary. Wallace C. Sparkman has represented to us that he has no beneficial interest in Diamond S. DGT. 42 We have established a bonus program for our officers. At the end of each of our fiscal years, our Board of Directors reviews our operating history and determines whether or not any bonuses should be paid to our officers. If so, the Board of Directors determines what amount should be allocated to each of two bonus pools. The first bonus pool is payable directly to officers recommended by the Compensation Committee to the Board of Directors based upon the officers' percentages of annual salaries. The second bonus pool is paid to officers based upon an evaluation process whereby the officers evaluate each other. The Board of Directors may discontinue the bonus program at any time. No options or warrants were granted by us to Wayne L. Vinson or Earl R. Wait during our fiscal year ended December 31, 2001. The following table provides information with respect to warrants granted during our fiscal year ended December 31, 2001, to Wallace C. Sparkman. 43 OPTION AND WARRANT GRANTS IN LAST FISCAL YEAR
Percent of Total Options and Number of Warrants Shares Granted to Underlying Employees Grant Prospectus Warrants In Fiscal Exercise Expiration Date Date Name Granted Year Price Date Value Value - ---- ---------- ------------ -------- ---------- ------ ---------- Wallace C. Sparkman 21,467 100% $2.50 12/31/06 $7,309 $80,730
We utilize the Black-Scholes option pricing model to calculate the grant date and prospectus date fair value of each individual option grant. Assumed prices of $2.00 per share and $5.75 per share were used for the grant date and prospectus date fair values, respectively. The following additional assumptions were utilized in calculating the values: expected average annual volatility of 17.8%; average annual risk-free interest rate of 5.0%; and expected terms of five years. AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
Fiscal Year End Option Values ----------------------------- Number of Securities Value of Unexercised Shares Underlying Unexercised In-the-Money Warrants Acquired Value Warrants at Fiscal Year End at Fiscal Year End Name On Exercise Received Exercisable/Unexercisable Exercisable/Unexercisable - ---- ----------- -------- --------------------------- ------------------------- Wayne L. Vinson 0 0 0/0 0/0 Earl R. Wait 0 0 0/0 0/0 Wallace C. Sparkman 0 0 21,467/0 $69,767/0
The fiscal year end option value is based on an assumed initial public offering price of $5.75 per share of common stock less the exercise price of the warrant. COMPENSATION OF DIRECTORS Our directors who are not employees are paid $1,000 per quarter and at December 31 of each year will be issued a five year option to purchase 2,500 shares of our common stock at the then market value. We also reimburse our directors for accountable expenses incurred on our behalf. EMPLOYMENT AGREEMENTS We have entered into an employment agreement with Wayne L. Vinson that was in effect until December 31, 2001, and now continues indefinitely unless terminated on 90 days written notice by either Mr. Vinson or us. We have agreed to pay Mr. Vinson an annual minimum compensation of $120,000 and an annual bonus to be determined at the discretion of the directors. 44 We have entered into an employment agreement with Earl R. Wait that is in effect until September 30, 2002. We have agreed to pay Mr. Wait an annual minimum compensation of $90,000 and an annual bonus to be determined at the discretion of the directors. 1998 STOCK OPTION PLAN We have adopted the 1998 Stock Option Plan which provides for the issuance of options to purchase up to 150,000 shares of our common stock. The purpose of the plan is to attract and retain the best available personnel for positions of substantial responsibility and to provide additional incentive to employees and consultants and to promote the success of our business. The plan is administered by the Board of Directors or a compensation committee consisting of two or more non-employee directors, if appointed. At its discretion, the administrator of the plan may determine the persons to whom options may be granted and the terms upon which such options will be granted. In addition, the administrator of the plan may interpret the plan and may adopt, amend and rescind rules and regulations for its administration. Options to purchase 12,000 shares of our common stock at an exercise price of $2.00 per share and options to purchase 42,000 shares of our common stock at an exercise price of $3.25 per share have been granted under the plan and are outstanding. LIMITATIONS ON DIRECTORS' AND OFFICERS' LIABILITY Our Articles of Incorporation provide our officers and directors with certain limitations on liability to us or any of our shareholders for damages for breach of fiduciary duty as a director or officer involving certain acts or omissions of any such director or officer. This limitation on liability may have the effect of reducing the likelihood of derivative litigation against directors and officers and may discourage or deter shareholders or management from bringing a lawsuit against directors and officers for breach of their duty of care even though such an action, if successful, might otherwise have benefited us and our shareholders. Our Articles of Incorporation and bylaws provide certain indemnification privileges to our directors, employees, agents and officers against liabilities incurred in legal proceedings. Also, our directors, employees, agents or officers who are successful, on the merits or otherwise, in defense of any proceeding to which he or she was a party, are entitled to receive indemnification against expenses, including attorneys' fees, incurred in connection with the proceeding. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. We are not aware of any pending litigation or proceeding involving any of our directors, officers, employees or agents as to which indemnification is being or may be sought, and we are not aware of any other pending or threatened litigation that may result in claims for indemnification by any of our directors, officers, employees or agents. 45 PRINCIPAL SHAREHOLDERS The following table sets forth, as of the date hereof, the beneficial ownership of our common stock: (i) by each of our directors and executive officers and by Wallace C. Sparkman; (ii) by all of our executive officers and directors as a group; and (iii) by all persons known by us to beneficially own more than five percent of our common stock.
SHARES OF COMMON PERCENT BENEFICIALLY OWNED STOCK BENEFICIALLY ---------------------------------------- NAME AND ADDRESS OWNED BEFORE OFFERING AFTER OFFERING - ---------------- ------------------ --------------- -------------- Wallace O. and Naudain Sellers 685,659(1) 20.2% 13.6% P.O. Box 106, 6539 Upper York Road Solebury, PA 18963-0106 Wayne L. Vinson 0(2) 0.0% 0.0% 4404 Lennox Drive Midland, TX 79707 Scott W. Sparkman 516,467(3) 15.3% 10.3% 1604 Ventura Avenue Midland, TX 79705 Charles G. Curtis 58,000(4) 1.7% 1.1% 1 Penrose Lane Colorado Springs, CO 80906 James T. Grigsby 60,000 1.8% 1.2% 3345 Grimsby Lane Lincoln, NE 68502 Alan P. Kurus 31,704(5) 1.0% 0.6% 2000 Centerview Midland, TX 79706 Earl R. Wait 60,000(6) 1.8% 1.2% 109 Seco Portland, TX 78374 Wallace C. Sparkman 165,691(7) 4.9% 3.3% 4906 Oakwood Court Midland, TX 79707 All directors and executive officers as a group 1,411,830 40.3% 27.4% (seven persons) CAV-RDV, Ltd. 491,324(2) 14.6% 9.8% 1541 Shannon Drive Lewisville, TX 75077 RWG Investments LLC 394,000(8) 11.3% 7.6% 5980 Wildwood Drive Rapid City, SD 57902 Richard L. Yadon 294,183(9) 8.7% 5.9% P.O. Box 8715 Midland, TX 79708-8715
46 - ---------- (1) Includes 300,000 shares of common stock owned by the Wallace Sellers, July 11, 2002 GRAT, warrants to purchase 21,936 shares of common stock and 9,032 shares of common stock at $ 2.50 per share and at $3.25 per share, respectively, owned by Wallace Sellers, 34,691 shares of common stock owned by Naudain Sellers, and 300,000 shares of common stock owned by the Naudain Sellers, July 11, 2002 GRAT. Wallace and Naudain Sellers are husband and wife and are the beneficiaries of their respective trusts. (2) CAV-RDV, Ltd., a Texas limited partnership for the benefit of the children of Wayne L. Vinson, owns 470,250 shares of common stock and warrants to purchase 15,756 shares of common stock at $2.50 per share and 2,122 shares of common stock at $3.25 per share, respectively. Both children are 18 years old or older and Mr. Vinson is not a partner in CAV-RDV, Ltd. Mr. Vinson disclaims beneficial ownership of any of the shares of common stock. (3) Includes 20,000 shares of common stock owned by Scott W. Sparkman and 475,000 shares of common stock and warrants to purchase 21,467 shares of common stock at $2.50 per share owned by Diamond S DGT, a trust for which Mr. Sparkman is a co-trustee and co-beneficiary with his sister. (4) Represents warrants to purchase 40,000 shares of common stock at $3.25 per share and 18,000 shares of common stock which may be obtained upon conversion of shares of our 10% Convertible Series A Preferred Stock. (5) Represents warrants to purchase 31,704 shares of common stock at $3.25 per share owned by Mr. Kurus' individual retirement account but does not include options to purchase 9,000 shares of common stock at $3.25 per share that do not begin to vest until April 2003. (6) Does not include options to purchase 15,000 shares of common stock at $3.25 per share that do not begin to vest until April 2003. (7) Includes 105,691 shares owned by Diamente Investments, LLP, a Texas limited partnership of which Mr. Sparkman is a general and limited partner. (8) Includes an option to purchase 100,000 shares of common stock at $2.00 per share, warrants to purchase 32,000 shares of common stock at $3.25 per share and 12,000 shares of common stock which may be obtained upon conversion of shares of our 10% Convertible Series A Preferred Stock. RWG Investments LLC is a limited liability company the beneficial owner of which is Roland W. Gentner, 5980 Wildwood Drive, Rapid City, South Dakota 57902. (9) Includes warrants to purchase 14,683 shares of common stock at $2.50 per share. CERTAIN TRANSACTIONS In March 2001, we issued warrants that will expire on December 31, 2006, to purchase shares of our common stock at $2.50 per share to the following persons for guaranteeing the amount of our debt indicated:
NUMBER OF SHARES AMOUNT OF NAME UNDERLYING WARRANTS DEBT GUARANTEED ---- ------------------- --------------- Wallace O. Sellers 21,936 $548,399 Wallace C. Sparkman(1) 21,467 536,671 CAV-RDV, Ltd.(2) 15,756 393,902 Richard L. Yadon 9,365 234,121
47 - ---------- (1) Wallace C. Sparkman subsequently transferred his warrants for 21,467 shares to Diamond S DGT, a trust of which Scott W. Sparkman is the trustee and a beneficiary. Wallace C. Sparkman has represented to us that he has no beneficial interest in Diamond S DGT. (2) CAV-RDV, Ltd., is a Texas limited partnership for the benefit of the children of Wayne L. Vinson. Both children are eighteen years old or older and Mr. Vinson is not a partner in CAV-RDV, Ltd. Mr. Vinson disclaims beneficial ownership of the warrants. In April 2002, we issued five year warrants to purchase shares of our common stock at $3.25 per share to the following persons for guaranteeing the additional amount of our debt indicated:
NUMBER OF SHARES AMOUNT OF ADDITIONAL NAME UNDERLYING WARRANTS DEBT GUARANTEED ---- ------------------- -------------------- Wallace O. Sellers 9,032 $ 451,601 CAV-RDV, Ltd.(1) 2,122 106,098 Richard L. Yadon 5,318 265,879
- ---------- (1) CAV-RDV, Ltd., is a Texas limited partnership for the benefit of the children of Wayne L. Vinson. Both children are eighteen years old or older and Mr. Vinson is not a partner in CAV-RDV, Ltd. Mr. Vinson disclaims beneficial ownership of the warrants. Wayne L. Vinson, Earl R. Wait and Wallace C. Sparkman have also guaranteed approximately $197,000, $84,000 and $92,000, respectively, of additional debt for us without consideration. This debt was incurred when we acquired vehicles, equipment and software. In October, 1999, RWG Investments, LLC was granted a five year option to purchase 100,000 shares of our common stock at $2.00 per share in consideration of one of its members serving as an advisor to us. Hunter Wise Financial Group LLC served as our investment banker and advisor in connection with our acquisition of the compression related assets of Dominion Michigan for which we paid Hunter Wise a total fee of $440,000. James T. Grigsby, one of our directors, has a 1% interest in Hunter Wise. Charles G. Curtis, one of our directors, Alan P. Kurus, one of our officers, and RWG Investments, LLC, a beneficial owner of more than 5% of our outstanding stock, purchased our notes and five year warrants to purchase common stock in a private offering that commenced in October 2000 and concluded in May 2001. Mr. Curtis purchased $100,000 of the notes and warrants, Mr. Kurus purchased approximately $79,000 of the notes and warrants and RWG Investments, LLC purchased $80,000 of the notes and warrants. The notes and warrants purchased by Mr. Curtis, Mr. Kurus and RWG Investments, LLC were on the same terms and conditions as sales to non-affiliated purchasers in the private offering. Charles G. Curtis, one of our directors, and RWG Investments, LLC, a beneficial owner of more than 5% of our outstanding stock, purchased 18,000 shares and 12,000 shares, respectively, or $58,500 and $39,000, respectively, of our 10% Convertible Series A Preferred Stock in a private offering that commenced in July 2001. The shares purchased by Mr. Curtis and RWG Investments, LLC were on the same terms and conditions as sales to non-affiliated purchasers in the private offering. 48 DESCRIPTION OF SECURITIES THE FOLLOWING IS A SUMMARY DESCRIPTION OF ALL OF THE MATERIAL TERMS OF THE SECURITIES SPECIFIED. COMMON STOCK We are authorized to issue up to 30,000,000 shares of our common stock, $.01 par value. There are 3,357,632 shares of our common stock issued and outstanding as of the date of this prospectus. All shares of our common stock have equal voting rights and, when validly issued and outstanding, have one vote per share in all matters to be voted upon by shareholders. The shares of common stock have no preemptive, subscription, conversion or redemption rights and may be issued only as fully paid and non-assessable shares. Cumulative voting in the election of directors is not allowed, which means that the holders of a majority of the outstanding shares represented at any meeting at which a quorum is present will be able to elect all of the directors if they choose to do so and, in such event, the holders of the remaining shares will not be able to elect any directors. On liquidation, each common shareholder is entitled to receive a pro rata share of the assets available for distribution to holders of common stock. We have no stock option plan or similar plan which may result in the issuance of stock options, stock purchase warrants, or stock bonuses other than our 1998 Stock Option Plan pursuant to which an aggregate of 150,000 shares of common stock have been reserved for issuance. Options to purchase 12,000 shares of common stock with an average exercise price of $2.00 per share and options to purchase 42,000 shares of our common stock at an exercise price of $3.25 per share have been granted and are outstanding under the 1998 Stock Option Plan. WARRANTS Each warrant will entitle the holder to purchase one share of common stock at an exercise price of $____ for a period of four years from the date hereof subject to our redemption rights described below. The warrants will be issued pursuant to the terms of a warrant agreement between us and the warrant agent, Computershare Investor Services, Inc. We have authorized and reserved for issuance the shares of common stock issuable on exercise of the warrants. The warrants are exercisable to purchase a total of 1,650,000 shares of our common stock unless the underwriters' over-allotment option relating to the warrants is exercised, in which case the warrants are exercisable to purchase a total of 1,897,500 shares of common stock. The warrant exercise price and the number of shares of common stock purchasable upon exercise of the warrants are subject to adjustment in the event of, among other events, a stock dividend on, or a subdivision, recapitalization or reorganization of, the common stock, or the merger or consolidation of us with or into another corporation or business entity. Commencing one year from the date of this prospectus and until the expiration of the warrants, we may redeem all outstanding warrants, in whole but not in part, upon not less than 30 days' notice, at a price of $0.25 per warrant, provided that the closing price of our common stock equals or exceeds 175% of the warrant exercise price ($____ per share) for 20 consecutive trading days. The redemption notice must be provided not more than five business days after conclusion of the 20 consecutive trading days in which the closing price of the common stock equals or exceeds 175% of the warrant exercise price per share. In the event we exercise our right to redeem the warrants, the warrants will be exercisable until the close of business on the date fixed for redemption in such notice. If any warrant called for redemption is not exercised by such time, it will cease to be exercisable and the holder thereof will be entitled only to the redemption price. We must have on file a current registration statement with the SEC pertaining to the common stock underlying the warrants in order for a holder to exercise the warrants or in order for the warrants to be redeemed by us. The shares of common stock underlying the warrants must also be registered or qualified for sale under the securities laws of the states in which the warrant holders reside. We intend to use our best efforts to keep the registration statement current, but there can be no assurance that such registration statement (or any other registration statement filed by us covering shares of common stock underlying the warrants) can 49 be kept current. In the event the registration statement covering the underlying common stock is not kept current, or if the common stock underlying the warrants is not registered or qualified for sale in the state in which a warrant holder resides, the warrants may be deprived of any value. We are not required to issue any fractional shares of common stock upon the exercise of warrants or upon the occurrence of adjustments pursuant to anti-dilution provisions. We will pay to holders of fractional shares an amount equal to the cash value of such fractional shares based upon the then-current market price of a share of common stock. The warrants may be exercised upon surrender of the certificate representing such warrants on or prior to the expiration date (or earlier redemption date) of such warrants at the offices of the warrant agent with the form of "Election to Purchase" on the reverse side of the warrant certificate completed and executed as indicated, accompanied by payment of the full exercise price by check payable to the order of us for the number of warrants being exercised. Shares of common stock issued upon exercise of warrants for which payment has been received in accordance with the terms of the warrants will be fully paid and nonassessable. The warrants do not confer on the warrantholder any voting or other rights of our shareholders. Upon notice to the warrantholders, we have the right to reduce the exercise price or extend the expiration date of the warrants. Although this right is intended to benefit warrantholders, to the extent we exercise this right when the warrants would otherwise be exercisable at a price higher than the prevailing market price of the common stock, the likelihood of exercise, and the resultant increase in the number of shares outstanding, may impede or make more costly a change in our control. PREFERRED STOCK We are authorized to issue up to a total of 5,000,000 shares of preferred stock, $.01 par value. The shares of preferred stock may be issued in one or more series from time to time with such designations, rights, preferences and limitations as our Board of Directors may determine without the approval of our shareholders. The rights, preferences and limitations of separate series of preferred stock may differ with respect to such matters as may be determined by our Board of Directors, including without limitation, the rate of dividends, method or nature or prepayment of dividends, terms of redemption, amounts payable on liquidation, sinking fund provisions, conversion rights and voting rights. The ability of our Board of Directors to issue preferred stock could also be used by it as a means for resisting a change in our control and can therefore be considered an "anti-takeover" device. We currently have no plans to issue any additional shares of preferred stock. We designated 1,177,000, shares of our preferred stock as 10% Convertible Series A Preferred Stock. In 2001 and 2002, 381,654 of these shares were sold in a private offering. In the future, we plan to reduce the number of designated shares of Preferred Stock to the number of shares of Preferred Stock actually sold in the offering and underlying the warrants that were issued to the placement agent. The Preferred Stock has a cumulative annual dividend rate of 10% in cash. The annual dividend rate is payable 30 days after the end of each quarter beginning with the quarter ending September 30, 2001, when and if declared by our Board of Directors. Each share of Preferred Stock will be entitled to one vote per share with the holders of our outstanding common stock on any matter voted on at a meeting of our shareholders and to vote as a class on any matter required to be voted on by classes under Colorado law. The Preferred Stock initially is convertible into common stock on a one for one basis. The Conversion Price will be adjusted if at any time we complete an offering of our common stock at a price equivalent to less than 150% of the then Conversion Price of the Preferred Stock. The Conversion Price will also be adjusted if any investment is made in us at a price equivalent to less than the then Conversion Price of the Preferred Stock. The Conversion Price may also be adjusted for stock splits, stock dividends, certain reorganizations and certain reclassifications. The Preferred Stock will automatically convert into our common stock at any time after six months from the date hereof, if our common stock trades for 20 consecutive trading days after the six-month period at a price equivalent to 200% of the then Conversion Price (initially 200% is $6.50 per share). 50 The Preferred Stock has a per share liquidation preference of $3.25 plus accrued and unpaid dividends over our common stock. SERIES A 10% SUBORDINATED NOTES DUE DECEMBER 31, 2006 AND OUTSTANDING OPTIONS AND WARRANTS At the present time, we have outstanding $1,539,260 of Series A 10% Subordinated Notes due December 31, 2006. NGE, one of our subsidiaries, is the primary obligor on the notes and we are the guarantor. Interest only on the notes is payable annually on December 31. In addition, in conjunction with the issuance of the notes, we issued five year warrants to purchase 677,274 shares of common stock at $3.25 per share. In addition to those warrants, we have outstanding options to purchase 112,000 shares of our common stock at $2.00 per share, outstanding warrants to purchase 68,524 shares of our common stock at $2.50 per share and outstanding warrants to purchase 38,165 shares of our 10% Series A Preferred Stock at $3.25 per share. ANTI-TAKEOVER PROVISIONS Provisions of our Articles of Incorporation and bylaws could discourage acquisition bids and cause our common stock and warrants to trade at discounts to where they otherwise would trade. Our articles of incorporation and bylaws contain provisions that may discourage acquisition bids and may limit the price investors are willing to pay for our common stock and warrants. Our Articles of Incorporation and bylaws provide that: o directors will be elected for three-year terms, with approximately one-third of the board of directors standing for election each year; o the unanimous vote of the board of directors or the affirmative vote of the holders of not less than 80% of the votes entitled to be cast by the holders of all shares entitled to vote in the election of directors is required to change the size of the board of directors; and o directors may only be removed for cause by holders of not less than 80% of the votes entitled to be cast on the matter. Our board of directors has the authority to issue up to five million shares of preferred stock. The board of directors can fix the terms of the preferred stock without any action on the part of our stockholders. The issuance of shares of preferred stock may delay or prevent a change in control transaction or could be used to put in place a poison pill. This may adversely affect the market price and interfere with the voting and other rights of our common stock. TRANSFER AGENT, WARRANT AGENT AND REGISTRAR We have retained Computershare Investor Services, Inc., 350 Indiana Street, Suite 800, Golden, Colorado 80401, to serve as the transfer agent and registrar for our common stock and as the warrant agent for the warrants. 51 SHARES ELIGIBLE FOR FUTURE SALE On completion of this offering, we will have 5,007,632 shares of common stock outstanding. If the underwriters' over-allotment option is exercised in full, 5,255,132 shares of common stock will be outstanding. All of the shares of common stock sold in this offering and any shares sold by us upon exercise of the underwriters' over-allotment option will be freely tradeable without restriction or further registration under the Securities Act, except that any shares purchased by our "affiliates," as the term is defined in Rule 144, generally only may be sold in compliance with the limitations of Rule 144 described below. Of the 5,007,632 shares of common stock outstanding after this offering, 3,017,691 shares will be freely tradable without restriction in the public market, and 1,989,941 shares may be sold publicly only if registered under the 1933 Act or sold in accordance with an exemption from the registration requirements of the 1933 Act, such as Rule 144 As of the date of this prospectus we had 36 holders of our common stock. Prior to this offering, there has been no public market for our common stock. We are unable to estimate the number of shares that may be sold in the future by our existing shareholders or the effect, if any, that sales of shares by such shareholders, or the availability of the shares for sale, will have on the market price of the common stock prevailing from time to time. Sales of substantial amounts of our common stock in the public market could adversely affect prevailing market prices. For purposes of Rule 144, an "affiliate" of us is a person that, directly or indirectly through one or more intermediaries, controls, or is controlled by or is under common control with, us. In general, under Rule 144, a shareholder including an "affiliate," who has beneficially owned our shares for at least one year is entitled to sell, within any three-month period, a number of "restricted" shares that does not exceed the greater of: o one percent of the then outstanding shares of our common stock, or approximately 50,422 shares expected to be outstanding immediately after this offering; or o the average weekly trading volume in our common stock during the four calendar weeks preceding the filing of the notice reporting the sale. Sales under Rule 144 are subject to manner of sale limitations, notice requirements and the availability of current public information about us. Rule 144 (k) provides that a person who is not deemed our "affiliate" and who has beneficially owned our shares for at least two years is entitled to sell such shares at any time under Rule 144 without regard to the limitations described above. We estimate that approximately 1,367,691 outstanding shares of common stock fall in this category. As of the date of this prospectus, there were options and warrants outstanding to purchase 916,270 shares of our common stock with a weighted average exercise price of $3.04 and 381,654 shares of 10% Convertible Series A Preferred Stock outstanding that are convertible into 381,654 shares of our common stock. Each holder of our 10% Convertible Series A Preferred Stock has agreed to not sell any of the 10% Convertible Series A Preferred Stock or the common stock into which it is convertible for a period of 180 days after the closing date of this offering without the prior written consent of the representative of the underwriters. There are 150,000 shares that have been authorized to be issued pursuant to our 1998 Stock Option Plan. Following this offering, we may file a registration statement on Form S-8 covering the 150,000 shares of common stock issuable under our 1998 Stock Option Plan, thus permitting the resale of these shares in the public market without restriction under the Securities Act other than restrictions applicable to affiliates. 52 Our executive officers, directors, holders of five percent or more of our common stock and Wallace C. Sparkman have agreed, pursuant to lock-up agreements relating to the transfer of shares of our common stock, that they will not sell, transfer, hypothecate or convey any of our common stock or derivative securities by registration or otherwise for a period of 12 months from the date of this prospectus without the prior written consent of the representative of the underwriters. The representative of the underwriters has informed us that it has no current intentions of releasing any shares subject to the aforementioned lock-up agreements. Any determination by the representative of the underwriters to release any shares subject to the lock-up agreements would be based on a number of factors at the time of determination, including the market price and trading volumes of the common stock, the liquidity of the trading market for the common stock, general market conditions, the number of shares proposed to be sold, and the timing, purpose and terms of the proposed sale. There are no exceptions to the lock-up agreements except that individuals subject to the lock-up agreements may dispose of shares as bona fide gifts to persons who also enter into lock-up agreements that terminate 12 months after the date of this prospectus. 53 UNDERWRITING Subject to the terms and conditions of the underwriting agreement, the underwriters named below, for which Neidiger, Tucker, Bruner, Inc. is acting as the underwriters' representative, have agreed to purchase from us the number of shares and warrants set forth opposite their names, and will purchase the shares and warrants at the price to public less the underwriting discount set forth on the cover page of this prospectus:
UNDERWRITER NUMBER OF SHARES NUMBER OF WARRANTS ----------- ---------------- ------------------ Neidiger, Tucker, Bruner, Inc. --------- --------- Total 1,650,000 1,650,000 ========= =========
The underwriting agreement provides that the underwriters' obligations are subject to conditions precedent and that the underwriters are committed to purchase all shares and warrants offered hereby (other than those covered by the over-allotment option described below) if the underwriters purchase any shares and warrants. The representative has advised us that the underwriters propose to offer the shares and warrants offered hereby directly to the public at the price to public set forth on the cover page of this prospectus, and that they may allow to certain dealers that are members of the National Association of Securities Dealers, Inc., concessions not in excess of $_____. After the initial public distribution, the prices of the shares of common stock and warrants may change as a result of market conditions. No change in the terms will change the amount of proceeds to be received by us as set forth on the cover page of this prospectus. The representative has further advised us that the underwriters do not intend to confirm sales to any accounts over which any of them exercise discretionary authority. We have agreed to pay the representative a nonaccountable expense allowance of three percent of the aggregate public offering price of the shares and warrants offered, including the price of shares of common stock and warrants sold on exercise of the over-allotment option. We have paid $40,000 of the nonaccountable expense allowance to the representative. We have also agreed to pay all expenses in connection with qualifying the shares and warrants offered hereby for sale under the laws of such states as the representative may designate. We have granted the underwriters options, exercisable for 60 days after the date of this prospectus, to purchase up to 247,500 additional shares of common stock and to purchase up to 247,500 additional warrants at the same prices as the initial shares of common stock and its warrants offered. The underwriters may purchase the shares of common stock and warrants solely to cover over-allotments, if any, in connection with the sale of shares of shares and warrants offered hereby. If the over-allotment options are exercised in full, the total public offering price, underwriting discounts and gross proceeds to us will be $11,385,000, $1,024,650 and $10,360,350, respectively. The expenses of this offering are estimated to be $520,000. Our underwriters may engage in over-allotments, stabilizing transactions, syndicate short covering transactions and penalty bids in accordance with Regulation M under the Securities Exchange Act of 1934. Over-allotment involves sales by the underwriting syndicate in excess of the offering size, which create a syndicate short position. Stabilizing transactions permit bids to purchase our securities so long as the stabilizing bids do not exceed a specified maximum. Syndicate short covering transactions involve purchases of our securities in the open market after the distribution has been completed in order to cover syndicate short positions. Penalty bids permit our underwriters to reclaim a selling concession from a syndicate member when our securities originally sold by such selling group member are repurchased in the open market by the underwriters. These stablilizing stabilizing transactions, syndicate short covering transactions and penalty bids may cause the 54 price of the common stock and warrants to be higher than they would otherwise be in the absence of such transactions. These transactions may be effected on the American Stock Exchange or otherwise and, if commenced, may be discontinued at any time. Neither we nor the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the prices of the common stock or warrants. In addition, neither we nor any of the underwriters makes any representation that the underwriters will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. Our officers, directors and beneficial holders of 5% or more of our outstanding shares of common stock have agreed, pursuant to lock-up agreements relating to the transfer of shares of our common stock, that they will not sell, transfer, hypothecate or convey any of our shares of common stock by registration or otherwise for a period of 12 months from the date of this prospectus without the prior written consent of the representative of the underwriters. We will sell to the representative on completion of the offering, for a total purchase price of $100, representative's options entitling the representative or its assigns to purchase 165,000 shares of common stock and 165,000 warrants. The representative's options will be exercisable commencing one year from the date of this prospectus and will expire five years from the date of this prospectus. The representative's options will contain certain anti-dilution provisions and provide for the cashless exercise of the representative's options utilizing our securities. The exercise price of the representative's options to purchase common stock and warrants is 125% of the public offering price or $______ and $____ , respectively. The representative's warrants are exercisable at $____ per share. We will set aside and at all times have available a sufficient number of shares of common stock and warrants to be issued upon exercise of the representative's options and warrants. The representative's options and warrants and underlying securities will be restricted from sale, transfer, assignment or hypothecation for a period of one year after the date of this prospectus, except to officers of the representative, co-underwriters, selling group members and their officers or partners. Thereafter, the representative's options and warrants and underlying securities will be transferable provided such transfer is in accordance with the provisions of the Securities Act. Subject to certain limitations and exclusions, we have agreed, at the request of the representative, to register for sale the common stock and warrants issuable upon exercise of the representative's options and the underlying shares of common stock issuable upon exercise of the warrants included in the representative's options. For a period of three years after the date hereof, the representative has the right to designate an advisor to our board of directors. Such advisor will be reimbursed for his or her expenses for attending meetings of our board of directors and will receive compensation excluding any grants of options, equal to that received by the highest compensated outside director but will have no voting rights. At the closing of the offering, we will enter into a consulting agreement retaining the representative as a financial consultant at $3,000 per month for a 24 month period. In the third and fourth quarters of 2001 and first quarter of 2002, we sold 381,654 shares of our 10% Convertible Series A Preferred Stock at $3.25 per share for gross proceeds of approximately $1,240,000. We paid the representative a commission of approximately $124,000 and a nonaccountable expense allowance of approximately $37,000 and issued the representative warrants to purchase 38,165 shares of our 10% Convertible Series A Preferred Stock at $3.25 per share. 55 Prior to this offering, there has not been a public market for our securities. The public offering prices of the common stock and warrants have been determined by arm's-length negotiation between us and the representative. There is no direct relation between the offering prices and our assets, book value or net worth. Among the factors considered by us and the representative in pricing the common stock and warrants were the results of operations, the current financial condition and our future prospects, the experience of management, the amount of ownership to be retained by present stockholders, the general condition of the economy and the securities markets and the demand for securities of companies considered comparable to us. In connection with this offering, we and the underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act of 1933 and if such indemnification is unavailable or insufficient, we and the underwriters have agreed to damage contribution arrangements based upon relative benefits received from this offering and relative fault resulting in such damage. LEGAL MATTERS Dorsey & Whitney LLP, will pass upon the validity of the common stock and warrants offered in this prospectus. Jones & Keller, P.C., will pass upon certain legal matters for Neidiger, Tucker, Bruner, Inc., the representative of the underwriters. EXPERTS Our consolidated balance sheet as of December 31, 2001 and the consolidated statements of income and shareholders' equity and cash flows for the two years ended December 31, 2000 and 2001 and the statement of revenue and direct expenses of assets acquired by Great Lakes Compression, Inc. for the year ended December 31, 2000, included in this prospectus have been included herein in reliance on the report of HEIN + ASSOCIATES LLP , independent certified public accountants, given on the authority of that firm as experts in auditing and accounting. ADDITIONAL INFORMATION We have filed a registration statement on Form SB-2 under the Securities Act with the SEC in connection with this offering. This prospectus is part of the registration statement and does not contain all of the information contained in the registration statement or any of the exhibits filed with the registration statement. For further information about us, please see the registration statement and the exhibits filed with the registration statement. Summaries in this prospectus of the contents of any agreement or other document filed as an exhibit to this registration statement are not necessarily complete. In each instance, please refer to the copy of the agreement or other document filed as an exhibit to the registration statement. After we complete this offering, we will be required to file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read any document we file with the SEC, including the registration statement and the exhibits filed with the registration statement, without charge, at the SEC public reference room at 450 Fifth Street, N.W., Judiciary Plaza, Room 1024, Washington, D.C. 20549. You may copy all or any part of our SEC filings from these offices upon payment of the fees charged by the SEC. You may obtain information on the operation of the public reference room in Washington, D.C. by calling the SEC at 1-800-SEC-0330. Our SEC filings, including the registration statement and the exhibits filed with the registration statement, are available from the SEC's website at http://www.sec.gov, which contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. 56 INDEPENDENT AUDITOR'S REPORT The Board of Directors Natural Gas Services Group, Inc. We have audited the accompanying consolidated balance sheet of Natural Gas Services Group, Inc. and subsidiaries (the "Company") as of December 31, 2001, and the related consolidated statements of income, shareholders' equity and cash flows for the years ended December 31, 2001 and 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2001, and the results of its operations and its cash flows for the years ended December 31, 2001 and 2000 in conformity with accounting principles generally accepted in the United States of America. HEIN + ASSOCIATES LLP Dallas, Texas March 14, 2002 F-1 NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET ASSETS
MARCH 31, 2002 DECEMBER 31, 2001 -------------- ----------------- (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 136,252 $ 506,669 Trade accounts receivable, no allowance for doubtful accounts considered necessary 1,361,301 985,709 Lease receivable, net of unearned interest of $33,565 and $36,620 87,971 84,916 Inventory 1,871,033 1,615,407 Prepaid expenses and other 33,768 55,000 ------------ ------------ Total current assets 3,490,325 3,247,701 PROPERTY AND EQUIPMENT, net 12,977,359 12,442,368 GOODWILL, net of accumulated amortization of $325,192 2,589,655 2,589,655 PATENTS, net of accumulated amortization of $89,325 and $82,454 162,038 168,910 LEASE RECEIVABLE, net of unearned interest of $25,380 and $32,592 187,334 210,504 INVESTMENT IN JOINT VENTURE 144,283 118,669 OTHER ASSETS 17,309 32,006 ------------ ------------ Total assets $ 19,568,303 $ 18,809,813 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt and capital lease $ 7,807,788 $ 916,291 Line of credit 675,000 -- Accounts payable and accrued liabilities 1,067,719 949,308 Deferred income 210,517 183,374 ------------ ------------ Total current liabilities 9,761,024 2,048,973 LONG-TERM DEBT, less current portion 1,928,267 9,048,028 CAPITAL LEASE, less current portion 41,490 44,807 SUBORDINATED NOTES, net of discount of $249,004 and $265,243 1,290,257 1,274,018 DEFERRED TAX LIABILITY 702,000 613,437 COMMITMENTS (Notes 5 and 13) SHAREHOLDERS' EQUITY: Preferred stock, 5,000,000 shares authorized, par value $0.01: 10% Convertible Series A: 1,177,000 shares authorized; 10% cumulative, liquidation preference of $1,240,376 and $1,225,751, respectively; 381,654 and 377,154 shares outstanding, respectively 3,817 3,772 Common stock, 30,000,000 shares authorized, par value $0.01; 3,357,632 shares issued and outstanding 33,576 33,576 Additional paid-in capital 4,455,495 4,442,816 Retained earnings 1,352,377 1,300,386 ------------ ------------ Total shareholders' equity 5,845,265 5,780,550 ------------ ------------ Total liabilities and shareholders' equity $ 19,568,303 $ 18,809,813 ============ ============
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS. F-2 NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED FOR THE THREE MONTHS ENDED DECEMBER 31, -------------------------------- ------------------------------ March 31, 2002 MARCH 31, 2001 2001 2000 -------------- -------------- ------------ ------------ (Unaudited) (Unaudited) REVENUE: Sales, net $ 1,690,879 $ 1,026,144 $ 5,667,106 $ 2,576,144 Leasing income and interest 999,517 383,848 3,095,001 1,075,509 ------------ ------------ ------------ ------------ Total revenue 2,690,396 1,409,992 8,762,107 3,651,653 COSTS OF REVENUE: Cost of sales, excluding depreciation 1,398,300 739,445 4,032,846 1,285,334 Cost of leasing, excluding depreciation 282,535 90,597 909,299 249,480 ------------ ------------ ------------ ------------ Total costs of revenue 1,680,835 830,042 4,942,145 1,534,814 ------------ ------------ ------------ ------------ GROSS PROFIT 1,009,561 579,950 3,819,962 2,116,839 OPERATING EXPENSES: Selling expenses 124,667 133,347 612,670 286,540 General and administrative 273,541 232,577 1,105,290 951,323 Depreciation and amortization 254,404 105,647 903,166 355,705 ------------ ------------ ------------ ------------ Total operating expenses 652,612 471,571 2,621,126 1,593,568 ------------ ------------ ------------ ------------ INCOME FROM OPERATIONS 356,949 108,379 1,198,836 523,271 OTHER INCOME (EXPENSE): Interest expense (257,360) (97,774) (924,382) (207,129) Equity in earnings of joint venture 83,452 5,607 224,231 17,792 Other income 1,698 60,378 197,208 30,608 ------------ ------------ ------------ ------------ Total other income (expense) (172,210) (31,789) (502,943) (158,729) ------------ ------------ ------------ ------------ INCOME FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES 184,739 76,590 695,893 364,542 PROVISION FOR INCOME TAXES: Current -- 26,806 9,100 38,262 ------------ ------------ ------------ ------------ Deferred 88,563 -- 304,800 108,973 ------------ ------------ ------------ ------------ Total income tax expense 88,563 26,806 313,900 147,235 ------------ ------------ ------------ ------------ INCOME BEFORE DISCONTINUED OPERATIONS 96,176 49,784 381,993 217,307 DISCONTINUED OPERATIONS: Loss from operations, including tax benefit of $20,000 -- -- -- (252,000) Gain on sale of subsidiary, no tax effect -- -- -- 943,771 ------------ ------------ ------------ ------------ Total discontinued operations -- -- -- 691,771 ------------ ------------ ------------ ------------ NET INCOME 96,176 49,784 381,993 909,078 PREFERRED DIVIDENDS 44,185 -- 10,908 -- ------------ ------------ ------------ ------------ NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 51,991 $ 49,784 $ 371,085 $ 909,078 ============ ============ ============ ============ NET INCOME PER COMMON SHARE: Basic $ .02 $ .02 $ 0.11 $ 0.27 ============ ============ ============ ============ Diluted $ .01 $ .02 $ 0.11 $ 0.27 ============ ============ ============ ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic 3,357,632 3,357,632 3,357,632 3,357,632 Diluted 3,798,176 3,357,632 3,483,987 3,357,632
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS. F-3 NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE PERIOD FROM JANUARY 1, 2000 THROUGH MARCH 31, 2002
NOTE PREFERRED STOCK COMMON STOCK RECEIVABLE ADDITIONAL TOTAL ------------------ -------------------- FROM PAID-IN RETAINED SHAREHOLDERS' SHARES AMOUNT SHARES AMOUNT SHAREHOLDER CAPITAL EARNINGS EQUITY -------- -------- ---------- -------- ------------ ---------- ------------ ------------ BALANCES, January 1, 2000 -- $ -- 4,050,000 $ 40,500 $ (164,558) $4,801,666 $ 20,223 $ 4,697,831 Forgiveness of receivable in divesture of subsidiary -- -- -- -- 164,558 -- -- 164,558 Common stock repurchased in divesture of subsidiary -- -- (692,368) (6,924) -- (1,377,812) -- (1,384,736) Net income -- -- -- -- -- -- 909,078 909,078 -------- -------- ---------- -------- ------------ ---------- ------------ ------------ BALANCES, January 1, 2001 -- -- 3,357,632 33,576 -- 3,423,854 929,301 4,386,731 Issuance of preferred stock 377,154 3,772 -- -- -- 899,461 -- 903,233 Warrants issued in connection with subordinated notes -- -- -- -- -- 96,364 -- 96,364 Warrants issued for debt guaranty -- -- -- -- -- 23,137 -- 23,137 Dividends on preferred stock -- -- -- -- -- -- (10,908) (10,908) Net income -- -- -- -- -- -- 381,993 381,993 -------- -------- ---------- -------- ------------ ---------- ------------ ------------ BALANCES, January 1, 2002 377,154 3,772 3,357,632 33,576 -- 4,442,816 1,300,386 5,780,550 -------- -------- ---------- -------- ------------ ---------- ------------ ------------ Issuance of preferred stock (unaudited) 4,500 45 -- -- -- 12,679 -- 12,724 Dividends on preferred stock (unaudited) -- -- -- -- -- -- (44,185) (44,185) Net income (unaudited) -- -- -- -- -- -- 96,176 96,176 -------- -------- ---------- -------- ------------ ---------- ------------ ------------ BALANCES, March 31, 2002 (unaudited) 381,654 $ 3,817 3,357,632 $ 33,576 $ -- $4,455,495 $ 1,352,377 $ 5,845,265 ======== ======== ========== ======== ============ ========== ============ ============
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS. F-4 NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31, -------------------------------- -------------------------------- March 31, 2002 March 31, 2001 2001 2000 -------------- -------------- ------------ ------------ (Unaudited) (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 114,538 $ 49,784 $ 381,993 $ 909,078 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 254,404 105,647 903,166 355,705 Deferred taxes -- -- 304,800 108,973 Amortization of debt issuance costs 16,239 5,413 64,956 -- Gain on disposal of assets -- (36,761) (117,387) (957,959) Warrants issued for debt guarantee -- 23,137 23,137 Equity in earnings of joint venture (83,452) (5,607) (224,231) (17,792) Changes in current assets: Trade and other receivables (375,592) (198,511) (360,868) (160,219) Inventory (255,626) (321,573) (593,403) (695,908) Prepaid expenses and other 21,233 74,190 25,190 (48,560) Changes in current liabilities: Accounts payable and accrued liabilities 188,612 316,908 472,779 241,319 Deferred income 27,143 (82,534) (9,826) 133,156 Other 14,694 (18,682) (30,551) (121,228) ------------ ------------ ------------ ------------ Net cash provided by (used in) operating activities (77,807) (88,589) 839,755 (253,435) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (782,522) (247,115) (2,220,110) (1,909,459) Proceeds from sale of property and equipment -- 113,000 328,500 9,850 Decrease in lease receivable 20,115 17,462 73,711 63,991 (Contributions to) distributions from joint venture 57,839 (11,199) 124,353 (1,000) Cash paid for acquisition -- (1,260,903) (1,393,113) -- ------------ ------------ ------------ ------------ Net cash used in investing activities (704,568) (1,388,755) (3,086,659) (1,836,618) CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from lines of credit 675,000 345,000 750,000 700,000 Proceeds from long-term debt -- 68,633 249,761 344,480 Repayments of long-term debt (231,581) (144,387) (592,258) (346,909) Dividend on preferred stock (44,185) -- (10,908) -- Proceeds from preferred stock, net of offering costs 12,724 -- 903,233 -- Proceeds from note offering, net of offering costs -- 1,088,380 1,310,839 -- ------------ ------------ ------------ ------------ Net cash provided by financing activities 411,958 1,357,626 2,610,667 697,571 NET INCREASE (DECREASE) IN CASH (370,417) (119,718) 363,763 (1,392,482) CASH, beginning of period 506,669 142,906 142,906 1,535,388 ------------ ------------ ------------ ------------ CASH, end of period $ 136,252 $ 23,188 $ 506,669 $ 142,906 ============ ============ ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $ 257,360 $ 97,774 $ 872,239 $ 207,129 ============ ============ ============ ============ Income taxes paid $ -- $ -- $ 2,566 $ -- ============ ============ ============ ============ Purchase of property and equipment for note payable $ -- $ -- $ 7,148,949 $ 328,540 ============ ============ ============ ============ Common stock repurchased in disposal of subsidiary $ -- $ -- $ -- $ 1,384,736 ============ ============ ============ ============
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS. F-5 NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (the period subsequent to December 31, 2001 is unaudited) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Principles of Consolidation Natural Gas Services Group, Inc. (the "Company" or "NGSG") (a Colorado corporation) was formed on December 18, 1998 for the purposes of combining the operations of certain manufacturing, service and leasing entities providing services to a customer base of oil and gas exploration and production companies operating primarily in Colorado, Kansas, Louisiana, Michigan, New Mexico, Oklahoma, Texas and Wyoming. On March 15, 1999, the Company acquired the following entities: o Flare King, Inc. ("Flare King") (a Texas corporation) is engaged in the manufacturing and distribution of natural gas flare stacks and ignition systems for use in oilfield, refinery, petrochemical plant, and landfill applications in New Mexico, California and Texas. In July 2000, the name of Flare King was changed to Rotary Gas Systems, Inc. ("RGS, Inc."). o Rotary Gas Systems, L.C. ("RGS") (a Texas limited liability corporation) was engaged in the packaging and distribution of natural gas compressors primarily for petroleum applications primarily in New Mexico and Texas. In July 2000 RGS was dissolved and its operations are now conducted through RGS, Inc. o NGE Leasing, Inc. ("NGE") (a Texas corporation) is engaged in leasing irrigation motor units to entities in the agricultural industry and natural gas compressor packages to entities in the petroleum industry. NGE's leasing income is concentrated in New Mexico, California and Texas. o CNG Engines Co. ("CNG") (a Texas corporation) is engaged principally in the manufacturing and distribution of irrigation motor units, and its sales are concentrated in California and Texas. The Company disposed of CNG on March 31, 2000. See Note 12. o Gas Engine Service, LLC ("GES") (a California limited liability corporation) is engaged in providing maintenance and repair services for natural gas engines and its revenues are concentrated in California. GES is a wholly-owned subsidiary of CNG and was disposed of with CNG on March 31, 2000. See Note 12. In March 2001, the Company's newly formed subsidiary, Great Lakes Compression, Inc. (a Colorado corporation) ("GLC"), acquired certain assets and operations of a business that fabricates, leases and services natural gas compressors to producers of oil and natural gas, primarily in Michigan. The accompanying financial statements present the consolidated results of the Company and its wholly-owned subsidiaries. Investments in joint ventures in which the Company does not have majority voting control are accounted for by the equity method. All intercompany balances and transactions have been eliminated in consolidation. Cash Equivalents For purposes of reporting cash flows, the Company considers all short-term investments with an original maturity of three months or less to be cash equivalents. F-6 NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (the period subsequent to December 31, 2001 is unaudited) Inventory Inventory is valued at the lower of cost or market. The costs of inventories are determined by the first-in, first-out method. Inventories consisted of the following:
MARCH 31, 2002 DECEMBER 31, 2001 -------------- ----------------- Raw materials $ 1,467,224 $ 1,340,930 Work in process 403,809 274,477 ------------ ------------ $ 1,871,033 $ 1,615,407 ============ ============
Property and Equipment Property and equipment is recorded at cost less accumulated depreciation and amortization. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets, which range from five to thirty years. Gains and losses resulting from sales and dispositions of property and equipment are included in current operations. Maintenance and repairs are charged to operations as incurred. Patents The Company has patents for a flare tip ignition device and flare tip burner pilot held by RGS. The costs of the patents are being amortized on a straight-line basis over nine years, the remaining life of the patents when acquired. Amortization expense for patents of $27,484 and $27,484 was recognized for the years ended December 31, 2001 and 2000, respectively. Amortization expense for each of the next five years is estimated to be $27,484 per year. Amortization expense for patents was $6,871 for each of the three-month periods ended March 31, 2002 and 2001. Goodwill Goodwill represents the cost in excess of fair value of the identifiable net assets acquired in various acquisitions and is being amortized on a straight-line basis over 20 years. Amortization expense of $124,425 and $100,404 was recognized for the years ended December 31, 2001 and 2000, respectively, and $25,101 was recognized for the three months ended March 31, 2001. The Company ceased amortization of goodwill effective January 1, 2002, in accordance with FAS 142, which is described under Recently Issued Accounting Pronouncements below. See Note 15. Long-Lived Assets The Company's policy is to periodically review the net realizable value of its long-lived assets, including patents and goodwill, through an assessment of the estimated future cash flows related to such assets. In the event that assets are found to be carried at amounts in excess of estimated undiscounted future cash flows, then the assets will be adjusted for impairment to a level commensurate with a discounted cash flow analysis of the underlying assets. Based upon its most recent analysis, the Company believes no impairment of long-lived assets exists at December 31, 2001 and March 31, 2002. Advertising Costs Advertising costs are expensed as incurred. Total advertising expense was $56,335 in 2001 and $12,072 in 2000, and was $9,443 and $11,339 for the three months ended March 31, 2002 and 2001, respectively. F-7 NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (the period subsequent to December 31, 2001 is unaudited) Revenue Recognition Revenue from the sale of custom and fabricated and rebuilt compressors, and flare systems are recognized upon shipment of the equipment to customers. Exchange and rebuilt compressor revenue is recognized when both the replacement compressor has been delivered and the rebuild assessment has been completed. Revenue from compressor service, and retrofitting services is recognized upon providing services to the customer. Operating lease revenue is recognized, over the term of the agreements. Maintenance agreement revenue is recognized as services are rendered. Deferred income represents items that have been billed to customers based on contractual agreements, but have not yet been shipped. Rental and lease revenue are recognized over the terms of the respective lease agreements based upon the classification of the lease. Stock-Based Compensation The Company applies Statement of Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock-Based Compensation, which requires recognition of the value of stock options and warrants granted based on an option pricing model. However, as permitted by SFAS 123, the Company continues to account for stock options and warrants granted to directors and employees pursuant to Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. See Note 10. Description of Leasing Arrangements The Company's leasing operations principally consist of the leasing of natural gas compressor packages and flare stacks. The Company has one seven-year lease of natural gas irrigation engines to an agricultural entity that is classified as a sales-type lease. The remaining leases are all classified as operating leases. See Note 5. Income Taxes The Company files a consolidated tax return for all the entities. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases, and operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Use of Estimates The preparation of the Company's financial statements in conformity with generally accepted accounting principles requires the Company's management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. Actual results could differ from those estimates. Significant estimates include the valuation of assets and goodwill acquired in acquisitions. It is at least reasonably possible these estimates could be revised in the near term and the revisions would be material. Recently Issued Accounting Pronouncements In June 2001, the Financial Accounting Standards Board ("FASB") issued Statements of Financial Accounting Standards ("FAS") No. 141, Business Combinations ("FAS 141"), and No. 142, Goodwill and Other Intangible Assets ("FAS 142"). FAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for under the purchase method. For all business combinations for which the date of acquisition is after June 30, 2001, FAS 141 also establishes specific criteria for the recognition of intangible assets separately from goodwill and requires unallocated negative goodwill to be written off immediately as an extraordinary gain, rather than deferred and amortized. FAS 142 changes the accounting for goodwill and other intangible assets after an acquisition. The most significant changes made by FAS 142 are: 1) goodwill and intangible assets with indefinite lives will no longer be amortized; 2) goodwill and intangible assets with indefinite lives must be tested for impairment at least annually; and 3) the amortization period for intangible assets with finite lives will no longer be limited to forty years. The Company does not believe that the adoption of FAS 141 will have a material effect on its financial position, results of operations, or cash flows. The Company adopted FAS 142 on January 1, 2002, at which time it ceased the amortization of goodwill. The result of the application of the non-amortization provisions of FAS 142 for goodwill resulted in a $25,101 reduction of amortization expense for the three months ended March 31, 2002 as compared to the three months ended March 31, 2001. At March 31, 2002, the Company's goodwill had a carrying value of $2,589,655. Pursuant to FAS 142, the Company will F-8 NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (the period subsequent to December 31, 2001 is unaudited) complete its test for goodwill impairment during the second quarter 2002 and, if impairment is indicated, record such impairment as a cumulative effect of accounting change effective January 1, 2002. The Company is currently evaluating the effect that the impairment review may have on its consolidated results of operation and financial position. In June 2001, the FASB also approved for issuance Statements of Financial Accounting Standards No. 143, Asset Retirement Obligations ("FAS 143"). FAS 143 establishes accounting requirements for retirement obligations associated with tangible long-lived assets, including 1) the timing of the liability recognition, 2) initial measurement of the liability, 3) allocation of asset retirement cost to expense, 4) subsequent measurement of the liability and 5) financial statement disclosures. FAS 143 requires that an asset retirement cost should be capitalized as part of the cost of the related long-lived asset and subsequently allocated to expense using a systematic and rational method. The Company will adopt the statement effective no later than January 1, 2003, as required. The transition adjustment resulting from the adoption of FAS 143 will be reported as a cumulative effect of a change in accounting principle. The Company does not believe that the adoption of this statement will have a material effect on its financial position, results of operations, or cash flows. In October 2001, the FASB also approved Statements of Financial Accounting Standards No. 144 ("FAS 144"), Accounting for the Impairment or Disposal of Long-Lived Assets. FAS 144 replaces Statements of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The new accounting model for long-lived assets to be disposed of by sale applies to all long-lived assets, including discontinued operations, and replaces the provisions of APB Opinion No. 30, Reporting Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, for the disposal of segments of a business. FAS 144 requires that those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. FAS 144 also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The provisions of FAS 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, are to be applied prospectively. Presently, the Company does not believe the adoption of this statement will have a material effect on its financial position, results of operations, or cash flows. Unaudited Information The balance sheet as of March 31, 2002 and the statements of income for the three-month periods ended March 31, 2002 and 2001 were taken from the Company's books and records without audit. However, in the opinion of management, such information includes all adjustments which are necessary to make not misleading the Company's financial position as of March 31, 2002 and the results of operations for the three months ended March 31, 2002 and 2001. The results of operations for the interim periods presented are not necessarily indicative of those expected for the year. F-9 NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (the period subsequent to December 31, 2001 is unaudited) 2. ACQUISITION In March 2001, the Company acquired the assets, primarily compressors, office furniture and fixtures, building and land of Dominion Michigan Production Services, Inc. ("Dominion") for a total purchase price of $8 million, subject to adjustment. $1 million of the purchase price was paid in cash with the remainder financed by the seller (see Note 7). The transaction was accounted for under the purchase method of accounting and the purchase price was allocated to the net assets acquired based on their estimated fair values. The excess of cost over the fair value of net assets acquired totaled approximately $741,000 and was recorded as goodwill as of the acquisition date. The operating results of the acquired business have been included in the Company's financial statements beginning April 1, 2001. The following unaudited pro forma information has been prepared as if the acquisition of the assets of Dominion had occurred at the beginning of each of the years ended December 31, 2001 and 2000. Such information is not necessarily reflective of the actual results that would have occurred had the acquisition occurred on those dates.
THREE MONTHS YEAR ENDED YEAR ENDED ENDED MARCH 31, DECEMBER 31, DECEMBER 31, --------------- -------------- -------------- 2001 2001 2000 --------------- -------------- -------------- Net sales $ 2,211,031 $ 9,563,146 $ 7,306,065 Net income $ 146,260 $ 429,276 $ 897,895 Net income per common share $ .04 $ 0.13 $ 0.27 Net income per common share, assuming dilution $ .04 $ 0.12 $ 0.27
In connection with the acquisition, a total fee of $440,000 was paid to the investment banker/advisor. A director of the Company has a 1% interest in the investment banker/advisor. 3. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
MARCH 31, DECEMBER 31, 2002 2001 ------------ ------------ Land and building $ 1,345,740 $ 1,345,740 Leasehold improvements 70,275 70,201 Equipment and furniture 516,173 505,120 Rental equipment 11,814,882 11,043,564 Vehicles 550,974 550,974 ------------ ------------ 14,298,044 13,515,599 Less accumulated depreciation (1,320,685) (1,073,231) ------------ ------------ $ 12,977,359 $ 12,442,368 ============ ============
Depreciation expense for property and equipment of $751,257 and $227,816 was recognized for the years ended December 31, 2001 and 2000, respectively. Depreciation expense for property and equipment of $247,454 and $247,533 was recognized for the three months ended March 31, 2002 and 2001, respectively. F-10 NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (the period subsequent to December 31, 2001 is unaudited) 4. INVESTMENT IN JOINT VENTURE The Company owns a non-controlling 50% interest in a joint venture, Hy-Bon Rotary Compression, LLC ("Hy-Bon"). This interest is accounted for on the equity method, in which the Company recognizes its share of the earnings or loss of the joint venture determined in accordance with the Hy-Bon operating agreement. The Company's total equity method investment in Hy-Bon at December 31, 2001 was $118,669. The Company's equity in the earnings of Hy-Bon was $224,231 and $17,792 in 2001 and 2000, respectively. Summarized financial information of Hy-Bon follows:
DECEMBER 31, 2001 ----------------- BALANCE SHEET: ASSETS: Accounts receivable $ 178,255 Other current assets 62,842 Equipment, net 100,770 ------------- Total assets $ 341,867 ============= LIABILITIES: Accounts payable and accrued expenses $ 16,582 Notes payable 73,773 Members' capital 251,512 ------------- Total liabilities and equity $ 341,867 =============
FOR THE YEAR ENDED DECEMBER 31, --------------------------------- 2001 2000 ------------- ------------- STATEMENT OF OPERATIONS: Total revenue $ 644,170 $ 36,392 Total expenses 193,756 15,427 ------------- ------------- Net income $ 450,414 $ 20,965 ============= =============
5. LEASING ACTIVITY The following lists the components of the net investment in the Company's sales-type lease:
MARCH 31, 2002 DECEMBER 31, 2001 -------------- ----------------- Total minimum lease payments receivable $ 334,250 $ 364,632 Less unearned income (58,945) (69,212) ------------- ---------- $ 275,305 $ 295,420 ============= ==========
Future minimum lease payments are $121,536 per year until the lease expiration in December 2004. The Company leases natural gas compressor packages to entities in the petroleum industry. These leases are classified as operating leases and generally have original lease terms of one to five years and continue on a month-to-month basis thereafter. Future minimum lease payments for leases not on a month-to-month basis at December 31, 2001 are as follows: F-11 NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (the period subsequent to December 31, 2001 is unaudited) Year Ended December 31, 2002 $ 1,680,476 2003 799,831 2004 828,085 2005 861,208 ----- ----------- Total $ 4,169,600 ===========
6. LINE OF CREDIT The Company has a line of credit with a financial institution that allows for borrowings up to $750,000, bears interest at the prime rate plus 1% (5.75% at December 31, 2002 and 6.75% at March 31, 2002, respectively) and requires monthly interest payments with principal due at maturity on December 15, 2002. The note is collateralized by substantially all of the assets of the Company and is personally guaranteed by certain shareholders and their affiliated entities. Warrants were issued in 2001 to these shareholders for their guarantees (see Note 10). The line of credit includes certain covenants, the most restrictive of which require the Company to maintain certain working capital and debt to equity ratios and certain minimum net worth. The Company was in compliance with all covenants on the line of credit at December 31, 2001. At December 31, 2001, there was no outstanding balance, and at March 31, 2002, there was $675,000 outstanding on this line of credit. 7. LONG-TERM DEBT Long-term debt consists of the following:
MARCH 31, DECEMBER 31, 2002 2001 ---------- ------------ Note payable to a bank, interest at bank's prime rate plus 1.5% (6.25% at December 31, 2001), monthly payments of principal and interest of $10,127, until maturity in November 2002, with a final lump-sum payment of $124,614. This note is collateralized by equipment leased to a third party under a sales-type lease and is guaranteed by certain officers and shareholders of the Company. $ 158,105 $ 213,302 Three notes payable to a bank, interest at the prime rate plus 1% - 1.5% (5.75% - 6.25% at December 31, 2001), monthly principal payments of $11,667, $12,500 and $25,000, plus interest, until maturity in January 2006, November 2006 and December 2004. These notes have the same collateral and personal guarantees as the line of credit (Note 6). 2,146,661 2,294,162 Note payable to an individual, interest at 10%, monthly payments of principal and interest totaling $1,255 until maturity in August 2010. This note is collateralized by a building. 86,034 87,623 Note payable to a bank, interest at 11%, monthly payments of principal and interest totaling $2,614, until maturity in September 2010, collateralized by a building. 219,709 221,407 Various notes payable to commercial lenders, interest rates ranging from 1.9% to 10.5%, monthly payments of principal and interest until maturity dates ranging from March 2004 to October 2005. These notes are collateralized by various vehicles. 61,559 68,901
F-12 NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (the period subsequent to December 31, 2001 is unaudited)
MARCH 31, DECEMBER 31, 2002 2001 ----------- ----------- Various notes payable to a bank, interest rates ranging from prime plus 1% (5.75% at December 31, 2001 and 6.75% at March 31, 2002, respectively) to 9.5%, monthly payments of principal and interest until maturity dates ranging from April 2002 to July 2004. These notes are collateralized by various vehicles and certain of these notes are guaranteed by an officer and shareholder. 99,294 114,229 Note payable to Dominion (Note 2), interest at 9%, monthly payments of interest only until all outstanding principal and interest due upon maturity in March 2003. This note is collateralized by all assets originally acquired by GLC and a stock pledge of all issued and outstanding shares of GLC. No cash flow from GLC operations can be used to pay down any debt except this note until paid in full. 87.5% of the proceeds from any sale of collateralized assets must be immediately remitted to Dominion. 6,952,464 6,952,464 ----------- ---------- Total 9,723,826 9,952,088 Less current portion (7,795,559) (904,060) ----------- ---------- $ 1,928,267 $9,048,028 =========== ==========
Maturities of long-term debt based on contractual requirements for the years ending December 31, 2001 are as follows: 2002 $ 904,060 2003 7,624,487 2004 697,918 2005 309,092 2006 194,569 Thereafter 221,962 ----------- $ 9,952,088 ===========
8. SUBORDINATED NOTES On October 31, 2000, the Company initiated a private placement of subordinated debt units. Each unit consists of a $25,000 10% subordinated note due December 31, 2006 and a five-year warrant to purchase 10,000 shares of the Company's common stock at $3.25 per share. Interest only is payable annually, with all principal due at maturity. The warrants were valued at their estimated fair market value resulting in a discount relating to the warrants of $87,128. Proceeds from this offering totaled $1,539,260. Under the terms of the offering, all proceeds from the notes must be used for the operations of NGE Leasing. In connection with the offering, a placement agent was paid a 10% cash commission and 3% non-accountable expense allowance totaling $200,104, and was issued warrants in the same form as those issued in the offering for a total of 61,570 shares. The warrants were valued at their estimated fair market value of $9,236. Total debt issuance costs of $237,658 are recorded as a debt discount and the total debt discount of $324,786 is being amortized using the effective interest rate method over the life of the notes. Certain shareholders, officers and directors purchased units in this offering, (totaling $259,261 in notes and warrants representing 103,704 shares) on the same terms and conditions as non-affiliated purchasers in the offering. F-13 NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (the period subsequent to December 31, 2001 is unaudited) 9. INCOME TAXES The provision for income taxes consists of the following:
FOR THE YEAR ENDED DECEMBER 31, ------------------------------- 2001 2000 ------------ ------------ Current provision: Federal $ -- $ 12,967 State 9,100 25,295 ------------ ------------ 9,100 38,262 Deferred provision: Federal 269,100 72,823 State 35,700 36,150 ------------ ------------ 304,800 108,973 ------------ ------------ $ 313,900 $ 147,235 ============ ============
The income tax effects of temporary differences that give rise to significant portions of deferred income tax assets and liabilities are as follows:
AS OF DECEMBER 31, 2001 ----------------- Deferred income tax assets: Allowance for doubtful account $ -- Net operating loss 260,048 ---------- Total deferred income tax assets 260,048 ---------- Deferred income tax liabilities: Property and equipment 735,600 Goodwill and other intangible assets 137,885 ---------- Total deferred income tax liabilities 873,485 ---------- Net deferred income tax liabilities $ 613,437 ==========
The effective tax rate differs from the statutory rate as follows:
FOR THE YEAR ENDED DECEMBER 31, ------------------------------- 2001 2000 ------ ------ Statutory rate 34% 34% State and local taxes 6% 4% Non-deductible goodwill amortization 14% 9% Other (9%) 5% Disposal of discontinued operations -- (38%) ------ ------ Effective rate 45% 14% ====== ======
At December 31, 2001, the Company had available net operating loss ("NOL") carryforwards of approximately $705,700, which may be used to reduce future taxable income and begin to expire in 2020 through 2021. F-14 NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (the period subsequent to December 31, 2001 is unaudited) 10. SHAREHOLDERS' EQUITY Warrants In March 2001, five year warrants to purchase common stock at $2.50 per share, exercisable immediately, were issued to certain board members and shareholders as compensation for their debt guarantees. These warrants were recorded at their estimated fair value of $23,137. Preferred Stock The Company has a total of 5,000,000 authorized preferred shares, with rights and preferences as designated by the Board of Directors. Of the preferred shares, 1,177,000 shares are designated 10% Convertible Series A Preferred Stock. The Series A shares have a cumulative annual dividend rate of 10%, when and if declared by the Board of Directors payable thirty days after the end of each quarter. Holders are entitled to one vote per share and the Series A shares are convertible into common stock initially at a price of $3.25 per share, subject to adjustment based on the market price and various other contingencies. In addition, Series A shares will automatically be converted to common stock on a one-for-one basis if or when the Company's common stock trades on a public exchange at a price of $6.50 per share or greater for twenty consecutive days. The Series A shares have a liquidation preference of $3.25 per share plus accrued and unpaid dividends over common stock. The Company initiated a private placement of its Series A shares in July 2001. Under the terms of the placement agreement, the Company offered a maximum of 770,000 Series A shares at a price of $3.25 per share. As of December 31, 2001, the Company had received gross proceeds of $1,225,751 from the offering, net of $322,518 of offering costs, for 377,154 Series A shares. Included in the offering costs, are a 10% commission and 3% non-accountable expense allowance paid to the placement agent. Subsequent to December 31, 2001, additional proceeds of $14,625 were received representing 4,500 additional Series A shares issued. Total Series A shares outstanding at March 31, 2002 were 381,654. A total of 18,000 and 12,000 Series A shares were issued in this offering to a director and a shareholder, respectively, on the same terms and conditions as those sold to non-affiliated purchasers in the private offering. 11. STOCK-BASED COMPENSATION Stock Options In December 1998, the Board of Directors adopted the 1998 Stock Option Plan (the "Plan"). 150,000 shares of common stock have been reserved for issuance under the Plan. All options granted under the Plan will expire ten years after date of grant. The option price is to be determined by the Board of Directors on date of grant. In September 1999, the Company granted 27,000 non-qualified stock options to certain employees to purchase the Company's common stock at $2.00 per share. The options vest over three years and expire in 2009. Also in September 1999, the Company granted 100,000 non-qualified stock options to an advisory director to purchase the Company's common stock at $2.00 per share anytime through September 30, 2004. F-15 NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (the period subsequent to December 31, 2001 is unaudited) The following is a summary of activity for the stock options outstanding for the years ended December 31, 2001 and 2000:
DECEMBER 31, 2001 DECEMBER 31, 2000 ------------------------- -------------------------- Weighted Weighted Number Average Number Average Of Exercise Of Exercise Shares Price Shares Price ---------- ---------- ---------- ---------- Outstanding, beginning of year 112,000 $ 2.00 127,000 $ 2.00 Canceled or expired -- -- (15,000) -- Granted -- -- -- -- Exercised -- -- -- -- ---------- ---------- ---------- ---------- Outstanding, end of year 112,000 $ 2.00 112,000 $ 2.00 ========== ========== ========== ========== Exercisable, end of year 112,000 $ 2.00 104,000 $ 2.00 ========== ========== ========== ==========
Pro Forma Stock-Based Compensation Disclosures As discussed in Note 1, the Company applies APB Opinion No. 25 and related interpretations in accounting for its stock options. Accordingly, no compensation cost has been recognized for grants of options to employees since the exercise prices were not lower than the market prices of the Company's common stock on the measurement date. Had compensation been determined based on the estimated fair value at the measurement dates for awards under those plans consistent with the method prescribed by SFAS No. 123, the Company's net income would have been changed to the pro forma amounts indicated below.
2001 2000 ---------- ---------- Net income: As reported $ 381,993 $ 909,078 Pro forma $ 373,390 $ 900,475
The fair value of each option granted prior to fiscal year 2000 was estimated on the date of grant using the Black-Scholes option-pricing model. There were no options issued in 2001 or 2000. 12. DISCONTINUED OPERATIONS On March 31, 2000, the Company disposed of CNG Engine Co. ("CNG") in a transaction whereby NGSG transferred all of the common stock of CNG to the former owner in exchange for all of the former owner's outstanding common stock in NGSG (692,368 shares) and a note receivable for $350,000. During the year ended December 31, 2000, the former owner defaulted on all payments due under the note receivable, and the entire amount has been reserved and reflected as a reduction in the gain from discontinued operations. The sale resulted in a non-taxable gain from discontinued operations of $943,771. Pre-tax loss from discontinued operations of $232,000 in the accompanying statement of income reflects the net loss from operations of CNG from January 1, 2000 through the date of disposal. Total revenue of CNG was $828,000 from January 1, 2000 through the date of disposal. F-16 NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (the period subsequent to December 31, 2001 is unaudited) 13. COMMITMENT 401(k) Plan Effective January 1, 2001, the Company offered a 401(k) Plan (the "Plan") to all employees that had reached the age of eighteen and had completed six months of service. The participants may contribute up to 15% of their salary. Employer contributions are subject to Board discretion and are subject to a vesting schedule of 20% each year after the first year and 100% after six years. The Company contributed $43,500 to the Plan in 2001. 14. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK Sales to one customer in the year ended December 31, 2001 and one customer in the year ended December 31, 2000 amounted to a total of 26% and 12% of the Company's consolidated revenue, respectively. No other single customer accounted for more than 10% of the Company's sales in 2001 or 2000. At December 31, 2001, the Company had one customer that accounted for 18% of the Company's trade accounts receivable. Sales to one customer in the three months ended March 31, 2002 and to one customer in the three months ended March 31, 2001, amounted to a total of 34% and 13% of the Company's consolidated revenue, respectively. At March 31, 2002, the Company had one customer that accounted for 21% of the Company's trade accounts receivable. The Company generally does not obtain collateral, but requires deposits of as much as 50% on large custom contracts. The Company performs periodic credit evaluations on its customers' financial condition and believes that no allowance for doubtful accounts for trade receivables is necessary at December 31, 2001 or March 31, 2002. 15. GOODWILL--ADOPTION OF FAS 142 (UNAUDITED) The Company adopted FAS 142 on January 1, 2002, at which time it ceased the amortization of goodwill. At March 31, 2002, the Company's goodwill had a carrying value of $2,589,655. Pursuant to FAS 142, the Company will complete its test for goodwill impairment during the second quarter 2002 and, if impairment is indicated, records such impairment as a cumulative effect of accounting change effective January 1, 2002. The following table sets forth the effect of the adoption of FAS 142 for each period.
FOR THE THREE MONTHS ENDED FOR THE YEAR ENDED MARCH 31, DECEMBER 31, ------------------------- -------------------------- 2002 2001 2001 2000 --------- ---------- ---------- ---------- REPORTED NET INCOME $ 51,991 $ 49, 784 $ 371,085 $ 909,078 Add back: Goodwill amortization, net of tax effect -- 21,168 78,372 78,803 --------- ---------- ---------- ---------- Adjusted net income $ 51,991 $ 70,952 $ 449,457 $ 987,881 --------- ---------- ---------- ---------- BASIC EARNINGS PER SHARE: Reported net income $ .02 $ .02 $ .11 $ .27 Goodwill amortization -- .01 .02 .02 --------- ---------- ---------- ---------- ADJUSTED NET INCOME $ .02 $ .03 $ .13 $ .29 ========= ========== ========== ========== DILUTED EARNINGS PER SHARE: Reported net income $ .01 $ .02 $ .11 $ .27 Goodwill amortization -- .01 .02 .02 --------- ---------- ---------- ---------- ADJUSTED NET INCOME $ .01 $ .03 $ .13 $ .29 ========= ========== ========== ==========
F-17 NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (the period subsequent to December 31, 2001 is unaudited) 16. SEGMENT INFORMATION Statement of Financial Accounting Standards No. 131, Disclosures About Segments of an Enterprise and Related Information, establishes standards for public companies relating to the reporting of financial and descriptive information about their operating segments in financial statements. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by chief operating decision makers in deciding how to allocate resources and in assessing performance. The Company identifies its segments based on its subsidiary entities. The Company's reportable operating segments have been determined as separately identifiable business units. The Company measures segment earnings as operating earnings, defined as income before interest and income taxes. The following amounts are expressed in thousands:
RGS NGE GLC NGSG Total --- --- --- ---- ----- FOR THE THREE MONTHS ENDED MARCH 31, 2002: Revenue from external customers $ 867 $ 499 $ 1,324 $ -- $ 2,690 Inter-segment revenue 1,417 -- -- -- 1,417 Gross profit 246 362 402 -- 1,010 Depreciation and amortization 29 86 130 9 254 Interest expense 2 89 157 9 257 Other income 1 84 -- -- 85 Income taxes -- -- -- 89 89 Net income 17 233 54 (208) 96 AS OF MARCH 31, 2002: Segment assets 1,865 6,246 9,129 2,328 19,568 Goodwill 1,873 -- 717 -- 2,590 Equity in the net income of investees accounted for by the equity method -- 83 -- -- 83
RGS NGE GLC NGSG Total --- --- --- ---- ----- FOR THE THREE MONTHS ENDED MARCH 31, 2001: Revenue from external customers $ 1,067 $ 343 $ -- $ -- $ 1,410 Inter-segment revenue 331 -- -- -- 331 Gross profit 327 253 -- -- 580 Depreciation and amortization 25 53 -- 28 106 Interest expense 1 89 -- 8 98 Other income 1 65 -- -- 66 Income taxes -- -- -- 27 27 Net income 67 142 -- (159) 50 AS OF MARCH 31, 2001: Segment assets 793 4,956 8,632 2,245 16,626 Goodwill 1,949 -- -- -- 1,949 Equity in the net income of investees accounted for by the equity method -- 6 -- -- 6 FOR THE YEAR ENDED DECEMBER 31, 2001: Revenue from external customers $ 3,841 $ 1,519 $ 3,402 $ -- $ 8,762 Inter-segment revenue 2,691 -- -- -- 2,691 Gross profit 1,231 1,076 1,513 -- 3,820 Depreciation and amortization 104 252 423 124 903 Interest expense 4 395 489 36 924 Other income 19 354 3 45 421 Income taxes -- -- -- 314 314 Net income 180 549 307 (654) 382
F-18
RGS NGE GLC NGSG Total --- --- --- ---- ----- AS OF DECEMBER 31, 2001: Goodwill 1,873 -- 717 -- 2,590 Segment assets 1,200 6,107 9,181 2,322 18,810 Equity in the net income of investees accounted for by the equity method -- 224 -- -- 224 FOR THE YEAR ENDED DECEMBER 31, 2000: Revenue from external customers $ 2,576 $ 1,076 $ -- -- $ 3,652 Inter-segment revenue 2,119 -- -- -- 2,119 Gross profit 1,291 826 -- -- 2,117 Depreciation and amortization 91 163 -- 102 356 Interest expense 7 194 -- 6 207 Other income 13 51 -- (16) 48 Income taxes -- -- -- 147 147 Discontinued operations -- -- -- 692 692 Net income 306 335 -- 268 909 AS OF DECEMBER 31, 2000: Segment assets 799 4,873 -- 2,337 8,009 Goodwill 1,974 -- -- -- 1,974 Equity in the net income of investees accounted for by the equity method -- 18 -- -- 18
********************* F-19 ASSETS ACQUIRED BY GREAT LAKES COMPRESSION, INC. INDEX TO FINANCIAL STATEMENTS
Page ---- INDEPENDENT AUDITOR'S REPORT................................................F-21 STATEMENT OF REVENUES AND DIRECT EXPENSES - for the Three Months Ended March 31, 2001 (Unaudited) and for the Year Ended December 31, 2000......................................................F-22 NOTES TO FINANCIAL STATEMENTS...............................................F-23
F-20 INDEPENDENT AUDITOR'S REPORT Board of Directors Great Lakes Compression, Inc. We have audited the accompanying statement of revenue and direct expenses of assets acquired by Great Lakes Compression, Inc. for the year ended December 31, 2000. This statement of revenue and direct expenses is the responsibility of the Company's management. Our responsibility is to express an opinion on this statement based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The accompanying statement of revenue and direct expenses was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission as described in Note 1 and is not intended to be a complete presentation of the revenues and expenses related to the net assets acquired. In our opinion, the statement of revenue and direct expenses presents fairly, in all material respects, the revenues and direct expenses for the year ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. HEIN + ASSOCIATES LLP Dallas, Texas July 31, 2001 F-21 ASSETS ACQUIRED BY GREAT LAKES COMPRESSION, INC. STATEMENTS OF REVENUE AND DIRECT EXPENSES
FOR THE THREE FOR THE YEAR ENDED MONTHS ENDED MARCH 31, DECEMBER 31, --------------------- ------------------- 2001 2000 ---------- ---------- (Unaudited) REVENUE: Compressor fabrication and sales $ 298,831 $ 102,731 Compressor leasing and service 502,208 3,551,681 ---------- ---------- Total revenue 801,039 3,654,412 COSTS AND EXPENSES: Costs of compressor sales 96,296 118,885 Costs of compressor leasing and service 251,104 2,013,920 ---------- ---------- Total costs and expenses 347,400 2,132,805 ---------- ---------- EXCESS OF REVENUE OVER DIRECT EXPENSES $ 453,639 $1,521,607 ========== ==========
F-22 ASSETS ACQUIRED BY GREAT LAKES COMPRESSION, INC. 1. BASIS OF PRESENTATION The accompanying financial statements present the historical revenue and direct expenses of certain compressors, facilities and related equipment (the "Assets") which were owned by Dominion Michigan Production Services, Inc. ("Dominion") and sold to Great Lakes Compression, Inc. (the "Company" or "GLC") on March 29, 2001 (Note 5). The assets are primarily located in Michigan. GLC is a wholly-owned subsidiary of Natural Gas Services Group, Inc. These financial statements present the revenue and direct expenses of these acquired assets on the accrual basis. These financial statements do not include general and administrative, depreciation or interest expense, because the Company only acquired certain assets of a cost center maintained by Dominion, not an entire business, and, therefore, these items are not expected to be comparable with those that would result from future operations of the assets. The financial statements were prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission and are not intended to be a complete presentation of the results of operations of Dominion or GLC. The activity from March 29, 2001, through March 31, 2001, is insignificant to the financial statements as a whole. Therefore, these financial statements are presented as if the acquisition closed on March 31, 2001. Unaudited Information The accompanying revenue and direct expenses for the three-month period ended March 31, 2001 are included herein without audit. In the opinion of management, these financial statements contain all adjustments (consisting only of normal recurring items) necessary to make the financial position and the results of operations for the periods presented not misleading. The results of operations as of and for the three months ended March 31, 2001 are not necessarily indicative of the results to be expected for the full year. 2. NATURE OF OPERATIONS GLC fabricates, leases and services natural gas compressors to producers of oil and natural gas, primarily in Michigan. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Revenue Recognition Revenue from the sale of fabricated equipment and services is recognized upon shipping of equipment and providing services to the customer. Rental and lease revenue is recognized over the terms of the respective lease agreements based upon the classification of the lease. Depreciation Depreciation of property, plant and equipment are computed using the straight-line method of accounting with estimated economic lives ranging from 3 to 30 years. Maintenance, repairs, and minor replacements are charged to expense as incurred. Depreciation expense was approximately $66,456 (unaudited) for the three months ended March 31, 2001, and $178,392 (unaudited) for the year ended December 31, 2000. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and F-23 ASSETS ACQUIRED BY GREAT LAKES COMPRESSION, INC. NOTES TO FINANCIAL STATEMENTS liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. 4. COMMITMENTS AND CONTINGENCIES Lease Commitments The Company's leasing arrangements consist primarily of compressor leases that are classified as operating leases requiring monthly payments of $10,800. The minimum required rental period has expired and all leases are now on a month-to-month basis. Service Agreements The Company has compressor service agreements covering approximately seventy compressors that are owned by Dominion Exploration & Production, Inc. Under these agreements, GLC is to provide certain daily maintenance and routine service to these units for an agreed-upon monthly fee through December 31, 2005. For these services, GLC receives total monthly fees from Dominion Exploration & Production, Inc. of $77,620. Environmental The Company is subject to environmental issues which are not considered routine for its business activities. In the opinion of management, the ultimate liability to the Company of such issues will not have a material adverse impact on its financial position. 5. SUBSEQUENT EVENT On March 29, 2001 GLC completed the purchase of all operating compression related assets from Dominion for cash consideration of $1,000,000 and a note payable to the seller of $7,000,000 subject to final purchase price adjustments. This acquisition included all tangible compression assets of the seller including compression fleet assets, related real estate, all compressor leases and service contracts as well as intangible compression assets owned by the seller including the corporate name of Great Lakes Compression, Inc. The acquisition was effective for accounting purposes March 31, 2001 and will be accounted for as a purchase. F-24 ASSETS ACQUIRED BY GREAT LAKES COMPRESSION, INC. NOTES TO FINANCIAL STATEMENTS F-25 ASSETS ACQUIRED BY GREAT LAKES COMPRESSION, INC. NOTES TO FINANCIAL STATEMENTS F-26 NATURAL GAS SERVICES GROUP, INC. 1,650,000 SHARES OF COMMON STOCK AND 1,650,000 WARRANTS TO PURCHASE 1,650,000 SHARES OF COMMON STOCK ---------- PROSPECTUS ---------- NEIDIGER, TUCKER, BRUNER, INC. _____________, 2002 We have not authorized any dealer, salesperson or other person to give any information or represent anything not contained in this prospectus. You must not rely on any unauthorized information. This prospectus does not offer to sell or buy any units in any jurisdiction where it is unlawful. The information in this prospectus is current only as of its date. PROSPECTUS SUMMARY ................................ 3 RISK FACTORS ...................................... 8 USE OF PROCEEDS ................................... 18 DIVIDEND POLICY ................................... 19 DILUTION .......................................... 20 CAPITALIZATION .................................... 21 SELECTED CONSOLIDATED FINANCIAL DATA .............. 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ..... 24 BUSINESS .......................................... 31 MANAGEMENT ........................................ 39 EXECUTIVE COMPENSATION ............................ 42 PRINCIPAL SHAREHOLDERS ............................ 46 CERTAIN TRANSACTIONS .............................. 47 DESCRIPTION OF SECURITIES ......................... 49 SHARES ELIGIBLE FOR FUTURE SALE ................... 52 UNDERWRITING ...................................... 54 LEGAL MATTERS ..................................... 56 EXPERTS ........................................... 56 ADDITIONAL INFORMATION ............................ 56
UNTIL ______, 2002, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 7-109-102 of the Colorado Business Corporation Act permits a Colorado corporation to indemnify any director against liability if such person acted in good faith and, in the case of conduct in an official capacity with the corporation, that the director's conduct was in the corporation's best interests and, in all other cases, that the director's conduct was at least not opposed to the best interests of the corporation or, with regard to criminal proceedings, the director had no reasonable cause to believe the director's conduct was unlawful. Section 7-109-103 of the Colorado Business Corporation Act provides that, unless limited by its articles of incorporation, a Colorado corporation shall indemnify a person who was wholly successful, on the merits or otherwise, in the defense of any proceeding to which the person was a party because the person is or was a director, against reasonable expenses incurred by him or her in connection with the proceeding. Section 3 of Article IX of our articles of incorporation, filed as Exhibit 3.1 hereto, provides that we shall indemnify, to the maximum extent permitted by law in effect from time to time, any person who is or was a director, officer, agent, fiduciary or employee of ours against any claim, liability or expense arising against or incurred by such person made party to a proceeding because such person is or was a director, officer, agent, fiduciary or employee of ours or because such person is or was serving another entity as a director, officer, partner, trustee, employee, fiduciary or agent at our request. We further have the authority to the maximum extent permitted by law to purchase and maintain insurance providing such indemnification. Article VI of our bylaws, filed as Exhibit 3.4 hereto, provides for the indemnification of certain persons. Section 8(b) of the form of underwriting agreement filed as Exhibit 1.1 hereto provides that the underwriter agrees to indemnify and hold harmless us, each of our directors, each of our officers who has signed the registration statement, each other person, if any, who controls us within the meaning of Section 15 of the Securities Act of 1933 or Section 20(a) of the Securities Exchange Act of 1934 with respect to statements or omissions, if any, made in any preliminary prospectus, the registration statement or the prospectus, or any amendment or supplement thereto, or in any application, in reliance upon and in conformity with written information furnished to us with respect to the underwriters, by or on behalf of the underwriters expressly for inclusion in any such document. Section 8(c) provides for contribution in circumstances where the indemnity provisions are unavailable. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. Expenses payable by us in connection with the issuance and distribution of the securities being registered hereby are as follows: II-1 SEC Registration Fee $ 2,556 NASD Filing Fee 3,275 American Stock Exchange Listing Fee 55,000 Accounting Fees and Expenses 55,000* Legal Fees and Expenses 100,000* Representative's Non-Accountable Expense Allowance 198,000 Printing, Freight and Engraving 100,000* Transfer Agent Fee 5,000* Miscellaneous 1,169* --------- Total $ 520,000 =========
*Estimated. ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES. Beginning in March 1999, we issued 1,000,000 shares of our common stock to 25 investors. The shares were issued in transactions not involving a public offering and were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933. The persons to whom the shares were issued had access to full information concerning us and represented that they acquired the shares for their own account and not for the purpose of distribution. The certificates for the shares contain a restrictive legend advising that the shares may not be offered for sale, sold or otherwise transferred without having first been registered under the 1933 Act or pursuant to an exemption from registration under the 1933 Act. The underwriter of this offering was Berry-Shino Securities, Inc. which received a commission of $126,000 and a nonaccountable expense allowance of $15,000. Beginning in October 2000, we issued 62 units comprised of Series A 10% Subordinated Notes and Five Year Warrants to Purchase Common Stock to 34 investors. The units were issued in transactions not involving a public offering and were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933. A Form D relating to the offering was filed with the Securities and Exchange Commission. The persons to whom the units were issued had access to full information concerning us and represented that they acquire the shares for their own account and not for the purpose of distribution. The certificates for the securities contain a restrictive legend advising that the shares may not be offered for sale, sold or otherwise transferred without having first been registered under the 1933 Act or pursuant to an exemption from registration under the 1933 Act. The underwriter of this offering was Berry-Shino Securities, Inc. which received a commission of $153,926, a nonaccountable expense allowance of $46,178 and warrants to purchase 61,570 shares of our common stock at $3.25 per share. In March 2001, we issued five year warrants to purchase 68,524 shares of our common stock at $2.50 per share in exchange for persons guaranteeing approximately $1,749,000 of our debt. The warrants were II-2 issued in a transaction not involving a public offering and were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933. The persons to whom the warrants were issued had access to full information concerning us. The certificates for the warrants contain a restrictive legend advising that the warrants and underlying shares may not be offered for sale, sold or otherwise transferred without having first been registered under the 1933 Act or pursuant to an exemption from registration under the 1933 Act. There was no underwriter involved in the exchange of the warrants for the guaranteeing of the debt. Beginning in July 2001, we issued 381,654 shares of our 10% Convertible Series A Preferred Stock to 35 investors. The shares were issued in transactions not involving a public offering and were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933. A Form D relating to the offering was filed with the Securities and Exchange Commission. The persons to whom the shares were issued had access to full information concerning us and represented that they acquired the shares for their own account and not for the purpose of distribution. The certificates for the shares contain a restrictive legend advising that the shares may not be offered for sale, sold or otherwise transferred without having first been registered under the 1933 Act or pursuant to an exemption from registration under the 1933 Act. The underwriter of this offering was Neidiger, Tucker, Bruner, Inc. which received a commission of $124,037 a nonaccountable expense allowance of $37,211 and warrants to purchase 38,165 shares of our 10% Convertible Series A Preferred Stock. In April 2002, we issued five year warrants to purchase 16,472 shares of our common stock at $3.25 per share in exchange for three persons guaranteeing approximately $824,000 of our debt. The warrants were issued in a transaction not involving a public offering and were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933. The persons to whom the warrants were issued had access to full information concerning us. The certificates for the warrants contain a restrictive legend advising that the warrants and underlying shares may not be offered for sale, sold or otherwise transferred without having first been registered under the 1933 Act or pursuant to an exemption from registration under the 1933 Act. There was no underwriter involved in the exchange of the warrants for the guaranteeing of the debt. ITEM 27. EXHIBITS. The following is a list of all exhibits filed as part of this Registration Statement:
EXHIBIT NO. DESCRIPTION AND METHOD OF FILING - ----------- -------------------------------- 1.1 Underwriting agreement. 1.2 Form of selected dealers agreement. 3.1 Articles of incorporation.* 3.2 Amendment to articles of incorporation dated March 31, 1999, and filed on May 25, 1999.* 3.3 Amendment to articles of incorporation dated July 25, 2001, and filed on July 30, 2001.* 3.4 Bylaws.* 4.1 Form of warrant certificate.* 4.2 Form of warrant agent agreement.*
II-3
EXHIBIT NO. DESCRIPTION AND METHOD OF FILING - ----------- -------------------------------- 4.3 Form of lock-up agreement.* 4.4 Form of representative's option for the purchase of common stock. 4.5 Form of representative's option for the purchase of warrants. 4.6 Form of consulting agreement between Natural Gas Services Group, Inc. and the representative. 5.1 Opinion of Dorsey & Whitney LLP on legality. 10.1 1998 Stock Option Plan.* 10.2 Asset Purchase Agreement between Natural Gas Acquisition Corporation and Great Lakes Compression, Inc. dated January 1, 2001.* 10.3 Amendment to Guaranty Agreement between Natural Gas Services Group, Inc. and Dominion Michigan Production Services, Inc. 10.4 Loan Agreement between Natural Gas Services Group, Inc., Wallace Sparkman, Wallace O. Sellers, CAV-RDV, Ltd., Diamente Investments, L.P., Rotary Gas Systems, Inc., NGE Leasing, Inc. and Western National Bank dated September 15, 1999, and First Amendment dated March 9, 2001, Second Amendment dated March 20, 2001, Third Amendment dated July 25, 2001, Fourth Amendment dated December 12, 2001, and Fifth Amendment dated April 2, 2002.* 10.5 Employment Agreement between Natural Gas Services Group, Inc. and Alan Kurus dated August 31, 2000.* 10.6 Employment Agreement between Natural Gas Services Group, Inc. and Wayne Vinson dated January 1, 1999.* 10.7 Employment Agreement between Natural Gas Services Group, Inc. and Earl R. Wait dated January 1, 1999.* 10.8 Form of Series A 10% Subordinated Notes due December 31, 2006.* 10.9 Form of Five-Year Warrants to Purchase Common Stock.* 10.10 Warrants issued to Berry-Shino Securities, Inc.* 10.11 Warrants issued to Neidiger, Tucker, Bruner, Inc.* 10.12 Form of warrant issued in March 2001 for guaranteeing debt.* 10.13 Form of warrant issued in April 2002 for guaranteeing debt.* 10.14 Exhibits 3(c)(1), 3(c)(2), 3(c)(3), 3(1)(4), 13(d)(1), 13(d)(2) and 13(d)(3) to Asset Purchase Agreement between Natural Gas Acquisition Corporation and Great Lakes Compression, Inc. dated January 1, 2001. 10.15 Amendment No. 6 to Loan Agreement between Natural Gas Services Group, Inc., Wallace Sparkman, Wallace O. Sellers, CAV-RDV, Ltd., Diamente Investments, L.P., Rotary Gas Systems, Inc., NGE Leasing, Inc. and Western National Bank dated September 15, 1999. 10.16 Certain exhibits to Loan Agreement between Natural Gas Services Group, Inc., Wallace Sparkman, Wallace O. Sellers, CAV-RDV, Ltd., Diamente Investments, L.P., Rotary Gas Systems, Inc., NGE Leasing, Inc. and Western National Bank dated September 15, 1999. 10.17 Commitment Letter dated June 24, 2002, from Western National Bank to Natural Gas Services Group, Inc. 10.18 Articles of Organization of Hy-Bon Rotary Compression, L.L.C. dated April 17, 2000 and filed on April 20, 2001. 10.19 Regulations of Hy-Bon Rotary Compression, L.L.C. 21 Subsidiaries of the registrant.* 23.1 Consent of HEIN + ASSOCIATES LLP. 23.4 Consent of Dorsey & Whitney LLP (included in Exhibit 5.1).
* Previously filed. II-4 ITEM 28. UNDERTAKINGS. The undersigned will: (1) File, during any period in which it offers or sells securities, a post-effective amendment to this registration statement to: (i) include any prospectus required by section 10(a)(3) of the Securities Act; (ii) reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement; and (iii) include any additional or changed material information on the plan of distribution. (2) For determining liability under the Securities Act, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering. (3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. The undersigned will provide to the underwriter at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the undersigned pursuant to the foregoing provisions, or otherwise, the undersigned has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the undersigned of expenses incurred or paid by a director, officer or controlling person of the undersigned in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the undersigned will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned will: (1) For determining any liability under the Securities Act, treat the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the undersigned under Rule 424(b)(1), or (4) or 497(h) under the Securities Act as part of this registration statement as of the time the Securities and Exchange Commission declared it effective. (2) For determining any liability under the Securities Act, treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in the registration statement, and that offering of the securities at that time as the initial bona fide offering of those securities. II-5 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned, in the City of Midland, State of Texas on July 16, 2002. NATURAL GAS SERVICES GROUP, INC. /s/ Wayne L. Vinson --------------------------------------------- Wayne L. Vinson, President and Principal Executive Officer /s/ Earl R. Wait --------------------------------------------- Earl R. Wait, Principal Financial and Accounting Officer In accordance with the requirements of the Securities Act of 1933, this registration statement was signed by the following persons in the capacities and on the dates stated:
SIGNATURE TITLE DATE - --------- ----- ---- /s/ Wallace O. Sellers Director July 16, 2002 - ---------------------------------------- Wallace O. Sellers /s/ Wayne L. Vinson Director July 16, 2002 - ---------------------------------------- Wayne L. Vinson /s/ Scott W. Sparkman Director July 16, 2002 - ---------------------------------------- Scott W. Sparkman /s/ Charles G. Curtis Director July 16, 2002 - ---------------------------------------- Charles G. Curtis /s/ James T. Grigsby Director July 16, 2002 - ---------------------------------------- James T. Grigsby
II-6 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION AND METHOD OF FILING PAGE NUMBER - ----------- -------------------------------- ----------- 1.1 Underwriting agreement. 1.2 Form of selected dealers agreement. 3.1 Articles of incorporation.* 3.2 Amendment to articles of incorporation dated March 31, 1999, and filed on May 25, 1999.* 3.3 Amendment to articles of incorporation dated July 25, 2001, and filed on July 30, 2001.* 3.4 Bylaws.* 4.1 Form of warrant certificate.* 4.2 Form of warrant agent agreement.* 4.3 Form of lock-up agreement.* 4.4 Form of representative's option for the purchase of common stock. 4.5 Form of representative's option for the purchase of warrants. 4.6 Form of consulting agreement between Natural Gas Services Group, Inc. and the representative. 5.1 Opinion of Dorsey & Whitney LLP on legality. 10.1 1998 Stock Option Plan.* 10.2 Asset Purchase Agreement between Natural Gas Acquisition Corporation and Great Lakes Compression, Inc. dated January 1, 2001.* 10.3 Amendment to Guaranty Agreement between Natural Gas Services Group, Inc. and Dominion Michigan Production Services, Inc. 10.4 Loan Agreement between Natural Gas Services Group, Inc., Wallace Sparkman, Wallace O. Sellers, CAV-RDV, Ltd., Diamente Investments, L.P., Rotary Gas Systems, Inc., NGE Leasing, Inc. and Western National Bank dated September 15, 1999, and First Amendment dated March 9, 2001, Second Amendment dated March 20, 2001, Third Amendment dated July 25, 2001, Fourth Amendment dated December 12, 2001, and Fifth Amendment dated April 2, 2002.* 10.5 Employment Agreement between Natural Gas Services Group, Inc. and Alan Kurus dated August 31, 2000.*
10.6 Employment Agreement between Natural Gas Services Group, Inc. and Wayne Vinson dated January 1, 1999.* 10.7 Employment Agreement between Natural Gas Services Group, Inc. and Earl R. Wait dated January 1, 1999.* 10.8 Form of Series A 10% Subordinated Notes due December 31, 2006.* 10.9 Form of Five-Year Warrants to Purchase Common Stock.* 10.10 Warrants issued to Berry-Shino Securities, Inc.* 10.11 Warrants issued to Neidiger, Tucker, Bruner, Inc.* 10.12 Form of warrant issued in March 2001 for guaranteeing debt.* 10.13 Form of warrant issued in April 2002 for guaranteeing debt.* 10.14 Exhibits 3(c)(1), 3(c)(2), 3(c)(3), 3(1)(4), 13(d)(1), 13(d)(2) and 13(d)(3) to Asset Purchase Agreement between Natural Gas Acquisition Corporation and Great Lakes Compression, Inc. dated January 1, 2001. 10.15 Amendment No. 6 to Loan Agreement between Natural Gas Services Group, Inc., Wallace Sparkman, Wallace O. Sellers, CAV-RDV, Ltd., Diamente Investments, L.P., Rotary Gas Systems, Inc., NGE Leasing, Inc. and Western National Bank dated September 15, 1999. 10.16 Certain exhibits to Loan Agreement between Natural Gas Services Group, Inc., Wallace Sparkman, Wallace O. Sellers, CAV-RDV, Ltd., Diamente Investments, L.P., Rotary Gas Systems, Inc., NGE Leasing, Inc. and Western National Bank dated September 15, 1999. 10.17 Commitment Letter dated June 24, 2002, from Western National Bank to Natural Gas Services Group, Inc. 10.18 Articles of Organization of Hy-Bon Rotary Compression, L.L.C. dated April 17, 2000 and filed on April 20, 2001. 10.19 Regulations of Hy-Bon Rotary Compression, L.L.C. 21 Subsidiaries of the registrant.* 23.1 Consent of HEIN + ASSOCIATES LLP 23.4 Consent of Dorsey & Whitney LLP (included in Exhibit 5.1).
* Previously filed. EX-1.1 3 d96705a1exv1w1.txt UNDERWRITING AGREEMENT EXHIBIT 1.1 1,650,000 SHARES OF COMMON STOCK 1,650,000 WARRANTS TO PURCHASE COMMON STOCK NATURAL GAS SERVICES GROUP, INC. UNDERWRITING AGREEMENT July , 2002 --- Neidiger, Tucker, Bruner, Inc. 1675 Larimer Street, Suite 300 Denver, Colorado 80202 Dear Sirs: Natural Gas Services Group, Inc., a Colorado corporation (the "Company"), hereby confirms its agreement with you (who are sometimes hereinafter referred to as the "Representative") and with the other members of the underwriting group (the "Underwriters") named on Schedule 1 hereto as follows: 1. Introductory. Subject to the terms and conditions contained herein, the Company proposes to issue and sell to the Underwriters 1,650,000 shares of common stock (the "Common Stock") and 1,650,000 redeemable warrants to purchase Common Stock (the "Warrants"). The Common Stock and Warrants shall be offered and sold separately and traded separately on the Nasdaq SmallCap Market. For the purpose of this Agreement, references hereinafter to Common Stock and Warrants shall sometimes be referred to as the "Securities" where appropriate. In addition, solely for the purpose of covering over-allotments, the Company grants to the Representative options to purchase up to an additional 247,500 shares of Common Stock and/or 247,500 Warrants (the "Additional Securities"), which options to purchase shall be exercisable, in whole or in part, from time to time during the sixty (60) day period commencing on the date on which the Registration Statement (as hereinafter defined) is initially declared effective (the "Effective Date") by the Securities and Exchange Commission (the "Commission"). Unless otherwise noted, the Common Stock, together with the additional 247,500 shares of Common Stock issuable on exercise of the over-allotment option, is referred to hereinafter as the "Common Stock" and the Warrants and the 247,500 Warrants issuable on exercise of the over-allotment option are referred to hereinafter as the "Warrants". Each Warrant will entitle the holder to purchase one share of Common Stock (a "Warrant Share") at a price equal to 125% of the offering price of the Common Stock during the four year exercise period of the Warrants, subject to the Company's right of redemption. The Warrants may be redeemed by the Company commencing one year from the Effective Date of the Registration Statement upon at least 30 days prior written notice, in whole but not in part, at a price of $.25 per Warrant provided the closing bid price for the Company's Common Stock is at least 175% of the exercise price of the Warrant during each day of the twenty (20) trading days immediately preceding the date of the Company's written notice of redemption; provided, that notice of any such redemption must be given not more than five days after such 20 day trading period. The terms and provisions of the Warrants shall be governed by a warrant agreement between the Company and its transfer agent (the "Warrant Agreement"), which Warrant Agreement will contain, among other provisions, anti-dilution protection for warrantholders on terms acceptable to the Representative. The Common Stock, Warrants and Additional Securities are more fully described in the Prospectus referred to below. All references to the Company below shall be deemed to include, where appropriate, the Company's subsidiaries, if any. 2. Representations and Warranties of the Company. The Company represents and warrants to, and agrees with, each of the Underwriters that: a. The Company has filed with the Commission a registration statement, and may have filed one or more amendments thereto, on Form SB-2 (Registration No. 333-88314), including in such registration statement and each such amendment a facing sheet, the information called for by Part I, audited consolidated financial statements for the past three fiscal years or such other period as may be appropriate, the information called for by Part II, the undertakings to deliver certificates, file reports and file post-effective amendments, the required signatures, consents of experts, exhibits, a related preliminary prospectus (a "Preliminary Prospectus") and any other information or documents which are required for the registration of the Common Stock and Warrants, the Warrant Shares, the Representative's purchase options and underlying Common Stock (hereinafter collectively referred to as the "Representative's Options" as more fully described in Section 5(p)), under the Securities Act of 1933, as amended (the "Act"). As used in this Agreement, the term "Registration Statement" means such registration statement, 2 including incorporated documents, all exhibits and consolidated financial statements and schedules thereto, as amended, when it becomes effective, and shall include information with respect to the Common Stock, the Warrants, the Warrant Shares and the Representative's Options, and the offering thereof permitted to be omitted from the Registration Statement when it becomes effective pursuant to Rule 430A of the General Rules and Regulations promulgated under the Act (the "Regulations"), which information is deemed to be included therein when it becomes effective as provided by Rule 430A; the term "Preliminary Prospectus" means each prospectus included in the Registration Statement or any amendments thereto, before it becomes effective under the Act and any prospectus filed by the Company with the consent of the Representative pursuant to Rule 424(a) of the Regulations; and the term "Prospectus" means the final prospectus included as part of the Registration Statement, except that if the prospectus relating to the securities covered by the Registration Statement in the form first filed on behalf of the Company with the Commission pursuant to Rule 424(b) of the Regulations shall differ from such final prospectus, the term "Prospectus" shall mean the prospectus as filed pursuant to Rule 424(b) from and after the date on which it shall have first been used. b. When the Registration Statement becomes effective, and at all times subsequent thereto, to and including the Closing Date (as defined in Section 3) and each Additional Closing Date (as defined in Section 3), and during such longer period as the Prospectus may be required to be delivered in connection with sales by the Representative or any dealer, and during such longer period until any post-effective amendment thereto shall become effective, the Registration Statement (and any post-effective amendment thereto) and the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment or supplement to the Registration Statement or the Prospectus) will contain all statements which are required to be stated therein in accordance with the Act and the Regulations, will comply with the Act and the Regulations, and will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and no event will have occurred which should have been set forth in an amendment or supplement to the Registration Statement or the Prospectus which has not 3 then been set forth in such an amendment or supplement; and no Preliminary Prospectus, as of the date filed with the Commission, included any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading; except that no representation or warranty is made in this Section 2(b) with respect to statements or omissions made in reliance upon and in conformity with written information furnished to the Company as stated in Section 8(b) with respect to the Underwriters by or on behalf of the Underwriters expressly for inclusion in any Preliminary Prospectus, the Registration Statement, or the Prospectus, or any amendment or supplement thereto. c. Neither the Commission nor the "blue sky" or securities authority of any jurisdiction has issued an order (a "Stop Order") suspending the effectiveness of the Registration Statement, preventing or suspending the use of any Preliminary Prospectus, the Prospectus, the Registration Statement, or any amendment or supplement thereto, refusing to permit the effectiveness of the Registration Statement, or suspending the registration or qualification of the Common Stock, the Warrants, the Warrant Shares, or the Representative's Options, nor has any of such authorities instituted or threatened to institute any proceedings with respect to a Stop Order. d. Any contract, agreement, instrument, lease, or license required to be described in the Registration Statement or the Prospectus has been properly described therein. Any contract, agreement, instrument, lease, or license required to be filed as an exhibit to the Registration Statement has been filed with the Commission as an exhibit to or has been incorporated as an exhibit by reference into the Registration Statement. e. The Company is a corporation duly organized, validly existing, and in good standing under the laws of the State of Colorado, with full power and authority, and all necessary consents, authorizations, approvals, orders, licenses, certificates, and permits of and from, and declarations and filings with, all federal, state, local, and other governmental authorities and all courts and other tribunals, to own, lease, license, and use its properties and assets and to carry on the business in the manner described in the Prospectus. The Company is duly qualified to do business and is in good standing in every jurisdiction in which its ownership, leasing, licensing, or use of property and assets 4 or the conduct of its business makes such qualifications necessary. The Company has no subsidiaries except as disclosed in the Prospectus. f. The authorized capital stock of the Company consists of 30,000,000 shares of Common Stock, of which 3,357,632 shares of Common Stock are issued and outstanding, 916,270 shares of Common Stock are reserved for issuance upon the exercise or conversion of currently outstanding options and warrants and 10% Convertible Series A Preferred Stock ("Convertible Preferred Stock"), 38,000 shares of Common Stock are reserved for issuance upon the exercise of the remaining options authorized under the Company's option plan; and 5,000,000 shares of preferred stock, of which 381,654 shares of Convertible Preferred Stock are issued and outstanding. Each outstanding share of Common Stock and Convertible Preferred Stock is validly authorized, validly issued, fully paid, and nonassessable, without any personal liability attaching to the ownership thereof, and has not been issued and is not owned or held in violation of any preemptive rights of stockholders. There is no commitment, plan, or arrangement to issue, and no outstanding option, warrant, or other right calling for the issuance of, any share of capital stock of the Company or any security or other instrument which by its terms is convertible into, exercisable for, or exchangeable for capital stock of the Company, except as set forth above, and as may be properly described in the Prospectus. g. The consolidated financial statements of the Company included in the Registration Statement and the Prospectus fairly present with respect to the Company the consolidated financial position, the results of operations, and the other information purported to be shown therein at the respective dates and for the respective periods to which they apply. Such consolidated financial statements have been prepared in accordance with generally accepted accounting principles, except to the extent that certain footnote disclosures regarding any stub period may have been omitted in accordance with the applicable rules of the Commission under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), consistently applied throughout the periods involved, are correct and complete, and are in accordance with the books and records of the Company. The accountants whose report on the audited consolidated financial statements is filed 5 with the Commission as a part of the Registration Statement are, and during the periods covered by their report(s) included in the Registration Statement and the Prospectus were, independent certified public accountants with respect to the Company within the meaning of the Act and the Regulations. No other financial statements are required by Form SB-2 or otherwise to be included in the Registration Statement or the Prospectus. There has at no time been a material adverse change in the consolidated financial condition, results of operations, business, properties, assets, liabilities, or future prospects of the Company from the latest information set forth in the Registration Statement or the Prospectus, except as may be properly described in the Prospectus. h. There is no litigation, arbitration, claim, governmental or other proceeding (formal or informal), or investigation pending, or, to the knowledge of the Company, threatened, or in prospect with respect to the Company or any of its operations, businesses, properties, or assets, except as may be properly described in the Prospectus or such as individually or in the aggregate do not now have and will not in the future have a material adverse effect upon the operations, business, properties, or assets of the Company. The Company is not in violation of, or in default with respect to, any law, rule, regulation, order, judgment, or decree except as may be properly described in the Prospectus or such as in the aggregate do not now have and will not in the future have a material adverse effect upon the operations, business, properties, or assets of the Company; nor is the Company required to take any action in order to avoid any such violation or default. i. The Company has good and marketable title in fee simple absolute to all real properties and good title to all other properties and assets which the Prospectus indicates are owned by it, free and clear of all liens, security interests, pledges, charges, encumbrances, and mortgages except as may be properly described in the Prospectus or such as in the aggregate do not now have and will not in the future have a material adverse effect upon the operations, business, properties, or assets of the Company. No real property owned, leased, licensed, or used by the Company lies in an area which is, or to the knowledge of the Company will be, subject to zoning, use, or building code restrictions which would prohibit, and no state of facts relating to the actions or inaction 6 of another person or entity or his or its ownership, leasing, licensing, or use of any real or personal property exists or will exist which would prevent, the continued effective ownership, leasing, licensing, or use of such real property in the business of the Company as presently conducted or as the Prospectus indicates it contemplates conducting, except as may be properly described in the Prospectus or such as in the aggregate do not now have and will not in the future have a material adverse effect upon the operations, business, properties, or assets of the Company. j. Neither the Company nor any other party is now or is expected by the Company to be in violation or breach of, or in default with respect to complying with, any material provision of any contract, agreement, instrument, lease, license, arrangement, or understanding which is material to the Company, and each such contract, agreement, instrument, lease, license, arrangement, and understanding is in full force and is the legal, valid, and binding obligation of the parties thereto and is enforceable as to them in accordance with its terms. The Company enjoys peaceful and undisturbed possession under all leases and licenses under which it is operating. The Company is not a party to or bound by any contract, agreement, instrument, lease, license, arrangement, or understanding, or subject to any charter or other restriction, which has had or may in the future have a material adverse effect on the financial condition, results of operations, business, properties, assets, liabilities, or future prospects of the Company. The Company is not in violation or breach of, or in default with respect to, any term of its Articles of Incorporation (or other charter document) or bylaws. k. All patents, patent applications, trademarks, trademark applications, trade names, service marks, copyrights, franchises, technology, know-how and other intangible properties and assets (all of the foregoing being herein called "Intangibles") that the Company owns or has pending, or under which it is licensed, are in good standing and uncontested. Except as otherwise disclosed in the Prospectus, the Intangibles are owned by the Company, free and clear of all liens, security interests, pledges, and encumbrances. All registered trademarks used by the Company to identify its services are protected by registration in the name of the Company on the principal register of the United States Patent Office. There is no right under any Intangible necessary to the business of the 7 Company as presently conducted or as the Prospectus indicates it contemplates conducting (except as may be so designated in the Prospectus). The Company has not infringed, is not infringing, and has not received notice of infringement with respect to asserted Intangibles of others. To the knowledge of the Company, there is no infringement by others of Intangibles of the Company. To the knowledge of the Company, there is no Intangible of others which has had or may in the future have a materially adverse effect on the financial condition, results of operations, business, properties, assets, liabilities, or future prospects of the Company. l. Neither the Company nor any director, officer, agent, employee, or other person associated with or acting on behalf of the Company has, directly or indirectly: used any corporate funds for unlawful contributions, gifts, entertainment, or other unlawful expenses relating to political activity; made any unlawful payment to foreign or domestic government officials or employees or to foreign or domestic political parties or campaigns from corporate funds; violated any provision of the Foreign Corrupt Practices Act of 1977, as amended; or made any bribe, rebate, payoff, influence payment, kickback, or other unlawful payment. The Company has not accepted any material advertising allowances or marketing allowances from suppliers to the Company and, to the extent any advertising allowance has been accepted, the Company has provided proper documentation to the supplier with respect to advertising as to which the advertising allowance has been granted. m. The Company has all requisite power and authority to execute and deliver, and to perform thereunder each of this Agreement, the Warrants, the Representative's Options and the Consulting Agreement described in Section 5(dd). All necessary corporate proceedings of the Company have been duly taken to authorize the execution and delivery, and performance thereunder by the Company of this Agreement, the Warrants, the Representative's Options and the Consulting Agreement. This Agreement has been duly authorized, executed, and delivered by the Company, is a legal, valid, and binding obligation of the Company, and is enforceable as to the Company in accordance with its terms. Each of the Warrants and the Consulting Agreement has been duly authorized by the Company and, when executed and delivered by the Company, will each 8 be a legal, valid, and binding obligation of the Company, and will be enforceable against the Company in accordance with its respective terms. No consent, authorization, approval, order, license, certificate, or permit of or from, or declaration or filing with, any federal, state, local, or other governmental authority or any court or other tribunal is required by the Company for the execution and delivery, or performance thereunder by the Company of this Agreement, the Warrants, the Representative's Options or the Consulting Agreement except filings under the Act which have been or will be made before the Closing Date and such consents consisting only of consents under "blue sky" or securities laws which are required in connection with the transactions contemplated by this Agreement and which have been obtained at or prior to the date of this Agreement. No consent of any party to any contract, agreement, instrument, lease, license, arrangement, or understanding to which the Company is a party, or to which any of its properties or assets are subject, is required for the execution or delivery, or performance thereunder of this Agreement, the Warrants, the Representative's Options or the Consulting Agreement; and the execution and delivery, and performance thereunder of this Agreement, the Warrants, the Representative's Options and the Consulting Agreement will not violate, result in a breach of, conflict with, or (with or without the giving of notice or the passage of time or both) entitle any party to terminate or call a default under any such contract, agreement, instrument, lease, license, arrangement, or understanding, or violate or result in a breach of any term of the Articles of Incorporation or by-laws of the Company, or violate, result in a breach of, or conflict with any law, rule, regulation, order, judgment, or decree binding on the Company or to which any of its operations, businesses, properties, or assets are subject. n. The Common Stock, the Warrants, the Warrant Shares, and the Representative's Option Securities are validly authorized and reserved for issuance. The Common Stock, when issued and delivered in accordance with this Agreement, the Warrant Shares, when issued and delivered upon exercise of the Warrants, the Common Stock underlying the Representative's Option Securities, when issued and delivered upon exercise of the Representative's Options, upon payment of the exercise price therefor, will be validly issued, fully paid, and nonassessable, without any personal liability 9 attaching to the ownership thereof, and will not be issued in violation of any preemptive rights of stockholders, and purchasers of any of the foregoing will receive good title thereto, all such title free and clear of all liens, security interests, pledges, charges, encumbrances, stockholders' agreements, and voting trusts. o. The Common Stock, the Warrants, the Warrant Shares, and the Representative's Options conform to all statements relating thereto contained in the Registration Statement and the Prospectus. p. Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, and except as may otherwise be properly described in the Prospectus, the Company has not (i) issued any securities or incurred any liability or obligation, primary or contingent, for borrowed money, (ii) entered into any transaction not in the ordinary course of business, or (iii) declared or paid any dividend on its capital stock. q. Neither the Company nor any of its officers, directors, or affiliates (as defined in the Regulations), has taken or will take, directly or indirectly, prior to the termination of the distribution of securities contemplated by this Agreement, any action designed to stabilize or manipulate the price of any security of the Company, or which has caused or resulted in, or which might in the future reasonably be expected to cause or result in, stabilization or manipulation of the price of any security of the Company, to facilitate the sale or resale of the Common Stock and Warrants. r. The Company has not incurred any liability for a fee, commission, or other compensation on account of the employment of a broker or finder in connection with the transactions contemplated by this Agreement. s. The Company has obtained from each officer, director and person who beneficially owns 5% or more of the shares of the Company's Common Stock or derivative securities convertible into shares of the Company's Common Stock his or her enforceable written agreement that for a period of 12 months from the Effective Date, he, she or it will not, without the Representative's prior written consent, offer, sell, contract to sell, pledge, hypothecate, or grant any option to purchase, or otherwise dispose of, directly or indirectly, any shares of Common Stock or any security or other instrument 10 convertible into or exchangeable for shares of Common Stock (except that, subject to compliance with applicable securities laws, any such officer, director or stockholder may transfer his, her or its stock in a transaction specified in such agreement, provided that any such transferee shall agree, as a condition to such transfer, to be bound by the restrictions set forth in the agreement). t. Except as otherwise provided in the Registration Statement, no person or entity has the right to require registration of shares of Common Stock or other securities of the Company because of the filing or effectiveness of the Registration Statement. u. The Company is eligible to use Form SB-2 for registration of the Common Stock, the Warrants, the Warrant Shares and the Representative's Options. v. No unregistered securities of the Company or of a predecessor of the Company have been sold by the Company or a predecessor within three years prior to the date hereof, except as described in the Registration Statement. w. Except as set forth in the Prospectus, there is and at the Closing Date there will be no action, suit or proceeding before any court, arbitration tribunal or governmental agency, authority or body pending or, to the knowledge of the Company, threatened which might result in judgments against the Company not adequately covered by insurance or which collectively might result in any material adverse change in the condition (financial or otherwise), the business or the prospects of the Company or would materially affect the properties or assets of the Company. x. The Company has filed all federal and state tax returns which are required to be filed by it and has paid all taxes shown on such returns and all assessments received by it to the extent such taxes have become due. All taxes with respect to which the Company is obligated have been paid or adequate accruals have been set up to cover any such unpaid taxes. y. Except as set forth in the Prospectus: i. The Company has obtained all permits, licenses and other authorizations which are required under the Environmental Laws for the ownership, use and operation of each location operated or leased by the Company (the "Property"), all such permits, licenses and authorizations are in effect, no 11 appeal nor any other action is pending to revoke any such permit, license or authorization, and the Company is in full compliance with all terms and conditions of all such permits, licenses and authorizations. ii. The Company and the Property are in material compliance with all Environmental Laws including, without limitation, all restrictions, conditions, standards, limitations, prohibitions, requirements, obligations, schedules and timetables contained in the Environmental Laws or contained in any regulation, code, plan, order, decree, judgment, injunction, notice or demand letter issued, entered, promulgated or approved thereunder. iii. The Company has not, and to the best knowledge of the Company's executive officers, no other person has, released, placed, stored, buried or dumped any Hazardous Substances, Oils, Pollutants or Contaminants or any other wastes produced by, or resulting from, any business, commercial, or industrial activities operations, or processes, on, beneath, or adjacent to the Property or any property formerly owned, operated or leased by the Company except for inventories of such substances to be used, and wastes generated therefrom, in the ordinary course of business of the Company (which inventories and wastes, if any, were and are stored or disposed of in accordance with applicable laws and regulations and in a manner such that there has been no material release of any such substances into the environment). iv. Except for a Phase I Environmental Assessment and Limited Subsurface Investigation Report dated May 21, 2001 and prepared by Gosling Czubak Engineering Sciences, Inc. and a report by Innovative Risk Management dated December 27, 1999, there exists no written or tangible report, synopsis or summary of any asbestos, toxic waste or Hazardous Substances, Oils, Pollutants or Contaminants investigation made with respect to all or any portion of the assets of the Company (whether or not prepared by experts and whether or not in the possession of the executive officers of the Company). 12 v. Definitions: As used herein: (1) Environmental Laws means all federal, state and local laws, regulations, rules and ordinances relating to pollution or protection of the environment, including, without limitation, laws relating to Releases or threatened Releases of Hazardous Substances, Oils, Pollutants or Contaminants into the indoor or outdoor environment (including, without limitation, ambient air, surface water, groundwater, land, surface and subsurface strata) or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, Release, transport or handling of Hazardous Substances, Oils, Pollutants or Contaminants. (2) Hazardous Substances, Oils, Pollutants or Contaminants means all substances defined as such in the National Oil and Hazardous Substances Pollutant Contingency Plan, 40 C.F.R. Section 300.6, or defined as such under any Environmental Law. (3) Release means any release, spill, emission, discharge, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or migration into the indoor or outdoor environmental (including, without limitation, ambient air, surface water, groundwater, and surface or subsurface strata) or into or out of any property, including the movement of Hazardous Substances, Oils, Pollutants or Contaminants through or in the air, soil, surface water, groundwater or any property. z. Any pro forma financial or other information and related notes included in the Registration Statement, each Preliminary Prospectus and the Prospectus comply in all material respects with the requirements of the Act and the rules and regulations of the Commission thereunder and present fairly the pro forma information shown, as of the dates and for the periods covered by such pro forma information. Such pro forma information, including any related notes and schedules, has been prepared on a basis consistent with the historical financial statements and other historical information, as applicable, included in the Registration Statement, the Preliminary Prospectus and the Prospectus, except for the pro forma adjustments specified therein, and give effect to 13 assumptions made on a reasonable basis to give effect to historical and, if applicable, proposed transactions described in the Registration Statement, each Preliminary Prospectus and the Prospectus. All of the above representations and warranties shall survive the performance or termination of this Agreement. 3. Purchase, Sale, and Delivery of the Common Stock and the Warrants. On the basis of the representations, warranties, covenants, and agreements of the Company herein contained, but subject to the terms and conditions herein set forth, the Company agrees to sell to the Underwriters, severally and not jointly, and the Underwriters, severally and not jointly, agree to purchase from the Company the number of shares of Common Stock and Warrants set forth opposite the Underwriters' names in Schedule 1 hereto. The purchase price per share of Common Stock to be paid by the Underwriters shall be $__________ and the purchase price per Warrant to be paid by the Underwriters shall be $.2275. The initial public offering price of the Common Stock shall be $__________ and the initial public offering price of the Warrants shall be $.25. Payment for the Common Stock and Warrants by the Underwriters shall be made by certified or official bank check in clearing house funds, payable to the order of the Company at the offices of the Representative, or at such other place in Denver, Colorado as the Representative shall determine and advise the Company by at least two full days' notice in writing, upon delivery of the Common Stock and Warrants to the Representative. Such delivery and payment shall be made at 10:00 a.m., Mountain Time, on the third business day following the time of the initial public offering, as defined in Section 10(a). The time and date of such delivery and payment are herein called the "Closing Date." In addition, the Company hereby grants to the Representative the option to purchase all or a portion of the Additional Securities as may be necessary to cover over-allotments, at the same purchase price per Additional Security as the price per share of Common Stock or Warrant provided for in this Section 3. The Representative may purchase Common Stock and/or Warrants when exercising such option, in its sole discretion. This option may be exercised by the Representative on the basis of the representations, warranties, covenants, and agreements of the Company herein contained, but subject to the terms and conditions herein set forth, at any 14 time and from time to time on or before the 60th day following the Effective Date of the Registration Statement, by written notice by the Representative to the Company. Such notice shall set forth the aggregate number of Additional Securities as to which the option is being exercised, and the time and date, as determined by the Representative, when such Additional Securities are to be delivered (such time and date are herein called an "Additional Closing Date"); provided, however, that no Additional Closing Date shall be earlier than the Closing Date nor earlier than the third business day after the date on which the notice of the exercise of the option shall have been given nor later than the eighth business day after the date on which such notice shall have been given; and further provided, that not more than two Additional Closings shall be noticed and held following purchase of Additional Securities by the Representative. Payment for the Additional Securities shall be made by certified or official bank check in clearing house funds payable to the order of the Company at the offices of the Representative, or at such other place in Denver, Colorado as you shall determine and advise the Company by at least two full days' notice in writing, upon delivery of certificates representing the Additional Securities to you. Certificates for the Common Stock and Warrants and any Additional Securities purchased shall be registered in such name or names and in such authorized denominations as you may request in writing at least two full business days prior to the Closing Date or Additional Closing Date, as applicable. The Company shall permit you to examine and package such certificates for delivery at least one full business day prior to any such closing with respect thereto. If for any reason one or more Underwriters shall fail or refuse (otherwise than for a reason sufficient to justify the termination of this Agreement under the provisions of Section 10 hereof) to purchase and pay for the number of shares of Common Stock and Warrants agreed to be purchased by such Underwriter, the Company shall immediately give notice thereof to the Representative, and the non-defaulting Underwriters shall have the right within 24 hours after the receipt by the Representative of such notice, to purchase or procure one or more other Underwriters to purchase, in such proportions as may be agreed upon among the Representative and such purchasing Underwriter or Underwriters and upon the terms herein set forth, the Common Stock and Warrants which such defaulting Underwriter or Underwriters agreed to 15 purchase. If the non-defaulting Underwriters fail so to make such arrangements with respect to all such Common Stock and Warrants, the number of shares of Common Stock and Warrants which each non-defaulting Underwriter is otherwise obligated to purchase under the Agreement shall be automatically increased pro rata to absorb the remaining Common Stock and Warrants which the defaulting Underwriter or Underwriters agreed to purchase; provided, however, that the non-defaulting Underwriters shall not be obligated to purchase the Common Stock and Warrants which the defaulting Underwriter or Underwriters agreed to purchase in excess of 10% of the total number of shares of Common Stock and Warrants which such non-defaulting Underwriter agreed to purchase hereunder, and provided further that the non-defaulting Underwriters shall not be obligated to purchase any Common Stock and Warrants which the defaulting Underwriter or Underwriters agreed to purchase if such additional purchase would cause the Underwriter to be in violation of the net capital rule of the Commission or other applicable law. If the total number of shares of Common Stock and Warrants which the defaulting Underwriter or Underwriters agreed to purchase shall not be purchased or absorbed in accordance with the two preceding sentences, the Company shall have the right, within the 24 hours next succeeding the 24-hour period above referred to, to make arrangements with other underwriters or purchasers satisfactory to the Representative for the purchase of such Common Stock and Warrants on the terms herein set forth. In any such case, either the Representative or the Company shall have the right to postpone the Closing for not more than seven business days after the date originally fixed as the Closing in order for any necessary changes in the Registration Statement, the Prospectus or any other documents or arrangements to be made. If neither the non-defaulting Underwriters nor the Company shall make arrangements within the 24-hour periods stated above for the purchase of all the Common Stock and Warrants which the defaulting Underwriter or Underwriters agreed to purchase hereunder, this Agreement shall be terminated without further act or deed and without any liability on the part of the Company to any non-defaulting Underwriter, except the Company shall be liable for actual expenses incurred by the Representative as provided in Section 10 hereof, and without any liability on the part of any non-defaulting Underwriter to the Company. 16 Nothing contained herein shall relieve any defaulting Underwriter of its liability, if any, to the Company or to the remaining Underwriters for damages occasioned by its default hereunder. 4. Offering. The Underwriters are to make a public offering of the Common Stock and Warrants as soon, on or after the effective date of the Registration Statement, as the Representative deems it advisable so to do. The Common Stock and Warrants are to be initially offered to the public at the initial public offering prices as provided for in Section 3 (such prices being herein called the "public offering prices"). After the initial public offering, you may from time to time increase or decrease the prices of the Common Stock and/or Warrants, in your sole discretion, by reason of changes in general market conditions or otherwise. 5. Covenants of the Company. The Company covenants that it will: a. Use its best efforts to cause the Registration Statement to become effective as promptly as possible. If the Registration Statement has become or becomes effective with a form of Prospectus omitting certain information pursuant to Rule 430A of the Regulations, or filing of the Prospectus is otherwise required under Rule 424(b), the Company will file the Prospectus, properly completed, pursuant to Rule 424(b) within the time period prescribed and will provide evidence satisfactory to you of such timely filing. b. Notify you immediately, and confirm such notice in writing, (i) when the Registration Statement and any post-effective amendment thereto become effective, (ii) of the receipt of any comments from the Commission or the "blue sky" or securities authority of any jurisdiction regarding the Registration Statement, any post-effective amendment thereto, the Prospectus, or any amendment or supplement thereto, and (iii) of the receipt of any notification with respect to a Stop Order or the initiation or threatening of any proceeding with respect to a Stop Order. The Company will use its best efforts to prevent the issuance of any Stop Order and, if any Stop Order is issued, to obtain the lifting thereof as promptly as possible. c. During the time when a prospectus relating to the Common Stock and Warrants or the Additional Securities is required to be delivered hereunder or under the Act or the Regulations, comply so far as it is able with all requirements imposed upon it by the Act, as now existing and as hereafter amended, and by the Regulations, as from 17 time to time in force, so far as necessary to permit the continuance of sales of or dealings in the Common Stock and Warrants and Additional Securities in accordance with the provisions hereof and the Prospectus. If, at any time when a prospectus relating to the Common Stock and Warrants or Additional Securities is required to be delivered hereunder or under the Act or the Regulations, any event shall have occurred as a result of which, in the reasonable opinion of counsel for the Company or counsel for the Representative, the Registration Statement or the Prospectus, as then amended or supplemented, contains any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, or if, in the opinion of either of such counsel, it is necessary at any time to amend or supplement the Registration Statement or the Prospectus to comply with the Act or the Regulations, the Company will immediately notify you and promptly prepare and file with the Commission an appropriate amendment or supplement (in form and substance satisfactory to you) which will correct such statement or omission or which will effect such compliance and will use its best efforts to have any such amendment declared effective as soon as possible. d. Deliver without charge to you such number of copies of each Preliminary Prospectus as you may reasonably request and, as soon as the Registration Statement or any amendment thereto becomes effective or a supplement is filed, deliver without charge to you two signed copies of the Registration Statement or such amendment thereto, as the case may be, including exhibits, and two copies of any supplement thereto, and deliver without charge to you such number of copies of the Prospectus, the Registration Statement, and amendments and supplements thereto, if any, without exhibits, as you may reasonably request for the purposes contemplated by the Act. e. Endeavor in good faith, in cooperation with you, at or prior to the time the Registration Statement becomes effective, to qualify the Common Stock and Warrants and Additional Securities for offering and sale under the "blue sky" or securities laws of such jurisdictions as you reasonably may designate; provided, however, that no such qualification shall be required in any jurisdiction where, as a result thereof, the Company would be subject to service of general process or to taxation as a foreign corporation 18 doing business in such jurisdiction to which it is not then subject. In each jurisdiction where such qualification shall be effected, the Company will, unless you agree in writing that such action is not at the time necessary or advisable, file and make such statements or reports at such times as are or may be required by the laws of such jurisdiction. f. Make generally available (within the meaning of Section 11 (a) of the Act and the Regulations) to its security holders as soon as practicable, but not later than fifteen (15) months after the date of the Prospectus, an earnings statement (which need not be certified by independent certified public accountants unless required by the Act or the Regulations, but which shall satisfy the provisions of Section 11(a) of the Act and the Regulations) covering a period of at least 12 months beginning after the effective date of the Registration Statement. g. For a period of 12 months after the date of the Prospectus, not, without your prior written consent, offer, issue, sell, contract to sell, grant any option for the sale of, or otherwise dispose of, directly or indirectly, any shares of Preferred Stock (particularly 10% Convertible Series A) or any shares of Common Stock (or any security or other instrument which by its terms is convertible into, exercisable for, or exchangeable for shares of Common Stock) except as provided in Section 3 and except for (i) the issuance of Warrant Shares issuable upon the exercise of Warrants or issuance of Common Stock underlying options or warrants outstanding on the date hereof, (ii) the issuance of shares underlying the Representative's Options, (iii) the issuance of Common Stock upon conversion of Convertible Preferred Stock, or (iv) the grant of options pursuant to the Company's existing stock option plan. h. For a period of five years after the Effective Date of the Registration Statement, furnish you, without charge, the following: i. Within 90 days after the end of each fiscal year, three copies of consolidated financial statements certified by independent certified public accountants, including a balance sheet, statement of operations, and statement of cash flows of the Company and its then existing subsidiaries, with supporting schedules, prepared in accordance with generally accepted accounting principles, at the end of such fiscal year and for the 12 months then ended; 19 ii. As soon as practicable after they have been sent to stockholders of the Company or filed with the Commission, three copies of each annual and interim financial and other report or communication sent by the Company to its stockholders or filed with the Commission; iii. As soon as practicable, two copies of every press release and every material news item and article in respect of the Company or its affairs which was released by the Company; iv. Notice of any regular quarterly or special meeting of the Company's Board of Directors concurrently with the sending of such notice to the Company's directors; and v. Such additional documents and information with respect to the Company and its affairs and the affairs of any of its subsidiaries as you may from time to time reasonably request. i. Designate an Audit Committee and a Compensation Committee, the members of which shall be subject to your reasonable approval, which will generally supervise the financial affairs of the Company and review executive compensation, respectively. j. Furnish to you as early as practicable prior to the Closing Date and any Additional Closing Date, as the case may be, but not less than two full business days prior thereto, a copy of the latest available unaudited interim consolidated financial statements of the Company which have been read by the Company's independent certified public accountants, as stated in their letters to be furnished pursuant to Section 7(e). k. File no amendment or supplement to the Registration Statement or Prospectus at any time, whether before or after the Effective Date of the Registration Statement, unless such filing shall comply with the Act and the Regulations and unless you shall previously have been advised of such filing and furnished with a copy thereof, and you and counsel for the Representative shall have approved such filing in writing within a reasonable time of receipt thereof. l. Comply with all periodic reporting and proxy solicitation requirements which may from time to time be applicable to the Company as a result of the Company's 20 registration under the Exchange Act on a Registration Statement on Form 8-A as required under Section 7(a) hereof. m. Comply with all provisions of all undertakings contained in the Registration Statement. n. Prior to the Closing Date or any Additional Closing Date, as the case may be, issue no press release or other communication, directly or indirectly, and hold no press conference and grant no interviews with respect to the Company, the financial condition, results of operations, business, properties, assets, or liabilities of the Company, or this offering, without your prior written consent. o. File timely with the Commission, the National Association of Securities Dealers, Inc. (the "NASD"), or Nasdaq all reports required to be filed. p. On or prior to the Closing Date, sell to the Representative for a total purchase price of $100, Representative's Options entitling the Representative or its assigns to purchase (i) 165,000 shares of Common Stock at a price equal to 125% of the public offering price of the Common Stock, and (ii) 165,000 Warrants at a price equal to 125% of the public offering price of the Warrants, with the terms of the Representative's Options, including exercise period, anti-dilution provisions, exercise price, exercise provisions, transferability, and registration rights, to be in the form filed as an exhibit to the Registration Statement. q. Until expiration of the Representative's Options, keep reserved sufficient shares of Common Stock for issuance upon exercise of the Representative's Options, and shares of Common Stock for issuance upon exercise of the warrants contained in the Representative's Options. r. Upon the Closing Date, engage a financial public relations firm acceptable to the Representative to assist the Company in preparing regular announcements and disseminating such information to the financial community, such engagement to extend for four consecutive six month terms; provided the Representative shall have the right to approve the public relations firm before the renewal of any six-month term. s. Adopt procedures for the application of the net proceeds the Company receives from the sale of the Common Stock and Warrants and apply the net proceeds 21 from the sale of the Common Stock and Warrants substantially in the manner set forth in the Prospectus, which does not contemplate repayment of debt to officers, directors, stockholders or affiliates of the Company, unless any deviation from such application is in accordance with the Prospectus and occurs only after approval by the Board of Directors of the Company and then only after the Board of Directors has obtained the written opinion of recognized legal counsel experienced in federal and state securities laws as to the propriety of any such deviation. t. Within the time period which the Prospectus is required to be delivered under the Act, comply, at its own expense, with all requirements imposed upon it by the Act, as now or hereafter amended, by the Rules and Regulations, as from time to time may be enforced, and by any order of the Commission, so far as necessary to permit the continuance of sales or dealing in the Common Stock and Warrants. u. At the Closing, deliver to the Representative true and correct copies of the Articles of Incorporation of the Company and all amendments thereto, all such copies to be certified by the Secretary of the Company; true and correct copies of the by-laws of the Company and of the minutes of all meetings of the directors and stockholders of the Company held prior to the Closing which in any way relate to the subject matter of this Agreement or the Registration Statement. v. Use all reasonable efforts to comply or cause to be complied with the conditions precedent to the several obligations of the Underwriters in Section 7 hereof. w. File with the Commission all required information concerning use of proceeds of the Public Offering in Forms 10-QSB and 10-KSB in accordance with the provisions of the Act and to provide a copy of such reports to the Representative and its counsel. x. Supply to the Representative and the Representative's counsel at the Company's cost, two bound volumes each containing material documents relating to the offering of the Common Stock and Warrants within a reasonable time after the Closing, not to exceed 90 days. y. As soon as possible prior to the Effective Date, and as a condition of the Underwriter's obligations hereunder, (i) have the Company listed on an accelerated basis, 22 and maintain such listing for not less than five years from the Closing Date, in Standard & Poor's Standard Corporation Records; (ii) have the Common Stock and Warrants quoted on The Nasdaq SmallCap Market as of the Effective Date, on the Closing Date, on the Additional Closing Date and thereafter for at least five years provided the Company is in compliance with The Nasdaq SmallCap Market maintenance requirements; and (iii) have appointed Computershare Investor Services, Inc. in Denver, Colorado or a firm acceptable to the Representative as its transfer agent, subject to competitive pricing. z. As soon as possible prior to the Effective Date and at such time as the Company qualifies for listing on the Nasdaq National Market, take all steps necessary to have the Company's Common Stock and Warrants, to the extent eligible, listed on the Nasdaq National Market. aa. Continue, for a period of at least three years following the Effective Date of the Registration Statement, to appoint such auditors as are reasonably acceptable to the Representative, which auditors shall (i) prepare consolidated financial statements in accordance with Regulation S-B or, if applicable, Regulation S-X under the General Rules and Regulations of the Act and (ii) examine (but not audit) the Company's consolidated financial statements for each of the first three (3) fiscal quarters prior to the announcement of quarterly financial information, the filing of the Company's 10-QSB quarterly report and the mailing of quarterly financial information to security holders. bb. Upon the Effective Date of the Registration Statement, obtain "key man" life insurance policies in the amount of $1,000,000 on the lives of certain key employees designated by the Representative, with the Company designated as the beneficiary of such policy, and pay the annual premiums thereon for a period of not less than three years from the Effective Date of the Registration Statement. cc. Cause its transfer agent to furnish the Representative a duplicate copy of the daily transfer sheets prepared by the transfer agent during the six-month period commencing on the Effective Date of the Registration Statement and instruct the transfer agent to timely provide, upon the request of the Representative, duplicate copies of such transfer sheets and/or a duplicate copy of a list of stockholders, all at the Company's expense, for a period of 4 1/2 years after such six-month period. 23 dd. On the Closing Date, enter into a Consulting Agreement with the Representative whereby the Company will agree to pay the Representative a financial consulting fee of $3,000 per month for the succeeding 24 month period. ee. Afford the Representative the right, but not the obligation, commencing on the Effective Date and surviving for a period of three years, to designate an observer to attend meetings of the Board of Directors. The designee, if any, and the Representative will receive notice of each meeting of the Board of Directors in accordance with Colorado law. Any such designee will receive reimbursement for all reasonable costs and expenses incurred in attending meetings of the Board of Directors, including but not limited to, food, lodging and transportation, together with such other fee or such compensation as is paid by the Company to the highest compensated outside member of the Board of Directors. Moreover, to the extent permitted by law, the Representative and its designee shall be indemnified for the actions of such designee as an observer to the Board of Directors and in the event the Company maintains a liability insurance policy affording coverage for the acts of its officers and/or directors, to the extent permitted under such policy, each of the Representative and its designee shall be an insured under such policy. During the stated three-year period, the Representative's adviser to the Company's Board of Directors will be (i) invited to attend meetings of the Company's Board of Directors; (ii) provided with a copy of all Actions by Unanimous Written consent of the Board of Directors in lieu of an actual meeting; (iii) furnished with a copy of all public filings by the Company and Company press releases as released; (iv) updated by the Company's management on at least a quarterly basis, regarding the Company's activities, prospects and financial condition; and (v) advised immediately of material events to the extent consistent with applicable law. During the subject three-year period, the Company will hold meetings of its Board of Directors at intervals of not less than 90 days. Any adviser designated by the Representative, as herein provided, shall be acceptable to the Company, which acceptance shall not be unreasonably withheld, and such designated adviser shall make certain representations in writing to the Company concerning his responsibilities under the federal securities laws with respect to information obtained by such adviser as a result of his attendance at meetings of the Board of Directors of the Company and as a 24 result of the receipt by him of other nonpublic information concerning the Company. It is currently anticipated that the Representative will request Anthony B. Petrelli to be appointed as Board adviser 6. Payment of Expenses. The Company hereby agrees to pay all expenses (subject to the last sentence of this Section 6) in connection with the offering, including but not limited to (a) the preparation, printing, filing, distribution, and mailing of the Registration Statement and the Prospectus, including NASD, SEC, Nasdaq filing and/or application fees, and the printing, filing, distribution, and mailing of this Agreement, any Agreement Among Underwriters, Selected Dealers Agreement, preliminary and final Blue Sky Memorandums, material to be circulated to the Underwriters by you and other incidental or related documents, including the cost of all copies thereof and of the Preliminary Prospectuses and of the Prospectus, and any amendments or supplements thereto, supplied to the Representative in quantities as hereinabove stated, (b) the issuance, sale, transfer, and delivery of the Common Stock and Warrants, the Additional Securities, the Warrant Shares and the Representative's Options, including, without limitation, any original issue, transfer or other taxes payable thereon and the costs of preparation, printing and delivery of certificates representing such securities, as applicable, (c) the qualification of the Common Stock and Warrants, Additional Securities, Warrant Shares and the Representative's Options under state or foreign "blue sky" or securities laws, (d) the fees and disbursements of counsel for the Company and the accountants for the Company, (e) the listing of the Common Stock and Warrants on the Nasdaq SmallCap Market, and (f) a Representative's non-accountable expense allowance equal to 2% of the aggregate gross proceeds from the sale of the Common Stock and Warrants and the Additional Securities. Prior to or immediately following the Closing Date, the Company shall bear the costs of tombstone announcements not to exceed $4,000, if requested to do so by the Representative. The Company shall pay all expenses incurred in connection with any road shows. The Company has previously remitted to the Representative the sum of $40,000, which sum has been credited as a partial payment in advance of the non-accountable expense allowance provided for in Section 6(f) above. 7. Conditions of Underwriters' Obligations. The Underwriters' obligation to purchase and pay for the Common Stock and Warrants and the Additional Securities, as provided 25 herein, shall be subject to the continuing accuracy of the representations and warranties of the Company contained herein and in each certificate and document contemplated under this Agreement to be delivered to you, as of the date hereof and as of the Closing Date (or the Additional Closing Date, as the case may be), to the performance by the Company of its obligations hereunder, and to the following conditions: a. The Registration Statement shall have become effective under the Securities Act of 1933, and the Company's Common Stock and Warrants shall have been registered under Section 12(g) of the Securities Exchange Act of 1934, not later than 5:00 p.m., local Denver time, on the date of this Agreement or such later date and time as shall be consented to in writing by you. b. At the Closing Date and any Additional Closing Date, you shall have received the favorable opinion of Dorsey & Whitney LLP, counsel for the Company, dated the date of delivery, addressed to you, and in form and scope satisfactory to your counsel, to the effect that: i. The Company is a corporation duly organized, validly existing, and in good standing under the laws of the State of Colorado, with corporate power to own, lease, license, and use its properties and assets and to conduct its business in the manner described in the Prospectus. The Company is duly qualified to do business as a foreign corporation and is in good standing in every jurisdiction in which its ownership, leasing, licensing, or use of property and assets or the conduct of its business makes such qualification necessary, except where the failure to be so qualified would not preclude it from enforcing its rights with respect to any material contract or expose it to any material liability; ii. The authorized capital stock of the Company as of the date of this Agreement consisted of 30,000,000 shares of Common Stock, of which 3,357,632 shares of Common Stock are issued and outstanding, 1,336,089 shares of Common Stock are reserved for issuance upon the exercise or conversion of outstanding options, warrants and Convertible Preferred Stock; 96,000 shares of Common Stock are reserved for issuance upon the exercise of the remaining options authorized under the Company's option plan; and 5,000,000 shares of 26 preferred stock, of which 381,654 shares of Convertible Preferred Stock are issued and outstanding. Each outstanding share of capital stock has been duly authorized, validly issued and fully paid and is nonassessable. Based upon a written inquiry to the Company and a review of the records of the Company in counsel's possession, counsel is not aware of any (i) commitment, plan, or arrangement to issue, or of an outstanding option, warrant, or other right calling for the issuance of, any share of capital stock of the Company or any security or other instrument which by its terms is convertible into, exercisable for, or exchangeable for capital stock of the Company, except as set forth above, and except as is properly described in the Prospectus or (ii) any outstanding a security or other instrument which by its terms is convertible into or exchangeable for capital stock of the Company, except as described in the Prospectus; iii. Based upon a written inquiry to the Company and a review of the records of the Company in counsel's possession, counsel is not aware of that there is any litigation, arbitration, claim, governmental or other proceeding (formal or informal), or investigation pending, threatened, or in prospect (or any basis therefor) with respect to the Company or any of its respective operations, businesses, properties, or assets, except as may be properly described in the Prospectus or such as individually or in the aggregate do not now have and will not in the future have a material adverse effect upon the operations, business, properties, or assets of the Company. Based upon a written inquiry to the Company and a review of the records of the Company in counsel's possession, counsel is not aware of any violation of, or in default with respect to, any law, rule, regulation, order, judgment, or decree, except as may be properly described in the Prospectus or such as in the aggregate have been disclosed to the Representative and do not now have and will not in the future have a material adverse effect upon the operations, business, properties, or assets of the Company; nor is counsel aware that the Company is required to take any action in order to avoid any such violation or default; 27 iv. Neither the Company nor any other party is now or is expected by the Company to be in violation or breach of, or in default with respect to, complying with any material provision of any contract, agreement, instrument, lease, license, arrangement, or understanding which is material to the Company; v. The Company is not in violation or breach of, or in default with respect to, any term of its Articles of Incorporation or by-laws; vi. The Company has all requisite corporate power and authority to execute and deliver and to perform under this Agreement, the Warrants, the Representative's Option and the Consulting Agreement. All necessary corporate proceedings of the Company have been taken to authorize the execution and delivery and performance thereunder by the Company of this Agreement, the Warrants, the Representative's Options and the Consulting Agreement. Each of this Agreement, the Warrants, the Representative's Options and the Consulting Agreement have been duly authorized, executed and delivered by the Company, and is a legal, valid, and binding obligation of the Company, and (subject to applicable bankruptcy, insolvency, and other laws affecting the enforceability of creditors' rights generally and equitable principles that may limit the enforceability of certain terms, including concepts of mutuality, responsibility, good faith and fair dealing, and other similar doctrines affecting the enforceability of agreements generally), enforceable as to the Company in accordance with their respective terms. No opinion need be given, however, to the enforceability of any indemnity provisions, forum selection clauses or arbitration clauses. No consent, authorization, approval, order, license, certificate, or permit of or from, or declaration or filing with, any federal, state, local, or other governmental authority or any court or other tribunal is required by the Company for the execution or delivery, or performance thereunder by the Company of this Agreement, the Warrants, Representative's Options and the Consulting Agreement (except filings under the Act which have been made prior to the Closing Date and consents consisting only of consents under "blue sky" or securities laws which are required in connection with the transactions contemplated by this Agreement, and which 28 have been obtained on or prior to the date the Registration Statement becomes effective under the Act). No consent of any party to any contract, agreement, instrument, lease, license, arrangement, or understanding to which the Company is a party, or to which any of its properties or assets are subject, is required for the execution or delivery, or performance thereunder of this Agreement, the Warrants, the Representative's Options or the Consulting Agreement; and the execution and delivery and performance thereunder of this Agreement, the Warrants, the Representative's Options and the Consulting Agreement will not violate, result in a breach of, conflict with, or (with or without the giving of notice or the passage of time or both) entitle any party to terminate or call a default under any such contract, agreement, instrument, lease, license, arrangement, or understanding, or violate or result in a breach of any term of the Articles of Incorporation or by-laws of the Company, or violate, result in a breach of, or conflict with any law, rule, regulation, order, judgment, or decree binding on the Company or to which any of its operations, businesses, properties, or assets are subject; vii. The shares of Common Stock are, the shares of Common Stock issuable on exercise of the Warrants will be, the shares of Common Stock underlying the Representative's Options will be upon exercise of the Representative's Options and upon issuance, delivery and payment therefor as described in the Registration Statement, validly authorized, validly issued, fully paid, and nonassessable and not issued in violation of any preemptive rights of stockholders of the Company, and the Underwriters will have received good title to the Common Stock and Warrants and Additional Securities purchased by them from the Company, free and clear of all liens, security interests, pledges, charges, encumbrances, stockholders' agreements, and voting trusts; upon payment for the Warrant Shares and the Representative's Options, the holders thereof will receive good title to such securities, free and clear of all liens, security interests, pledges, charges, encumbrances, stockholders' agreement and voting trusts. The Common Stock, the Warrants, the Warrant Shares and the Representative's Options 29 conform to all statements relating thereto contained in the Registration Statement or the Prospectus; viii. The Warrant Shares have been duly and validly reserved for issuance pursuant to the terms of the Warrant Agreement between the Company and its transfer agent and shares of Common Stock underlying the Representative's Options have been duly and validly reserved for issuance pursuant to the terms of the Representative's Options or the Warrant Agreement, as the case may be; ix. Any contract, agreement, instrument, lease, or license that is known to counsel and that is required to be described in the Registration Statement or the Prospectus has been properly described therein. Any contract, agreement, instrument, lease, or license that is known to counsel and that is required to be filed as an exhibit to the Registration Statement has been filed with the Commission as an exhibit to or has been incorporated as an exhibit by reference into the Registration Statement; x. Insofar as statements in the Prospectus purport to summarize the status of litigation or the provisions of laws, rules, regulations, orders, judgments, decrees, contracts, agreements, instruments, leases, or licenses, such statements have been prepared or reviewed by such counsel and accurately reflect the status of such litigation and provisions purported to be summarized and are correct in all material respects; xi. Except as provided in the Registration Statement, no person or entity has the right to require registration of shares of Common Stock or other securities of the Company because of the filing or effectiveness of the Registration Statement; xii. The Registration Statement has been declared effective under the Act. No Stop Order has been issued and no proceedings for that purpose have been instituted or threatened, and the Company's Common Stock and Warrants have been registered under the Securities Exchange Act of 1934; 30 xiii. The Registration Statement and the Prospectus, and any amendment or supplement thereto, comply as to form in all material respects with the requirements of the Act and the Regulations; xiv Such counsel has no reason to believe that either the Registration Statement or the Prospectus, or any amendment or supplement thereto, contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading (except that no opinion need be expressed as to the consolidated financial statements and other financial data and schedules which are or should be contained therein); xv. Since the Effective Date of the Registration Statement, such counsel has not been informed of any event which has occurred which should have been set forth in an amendment or supplement to the Registration Statement or the Prospectus has been set forth in such an amendment or supplement; xvi. The Company has not informed counsel that the Company is currently offering any securities for sale except as described in the Registration Statement; xvii. Such counsel has no knowledge of any promoter, affiliate, parent or subsidiaries of the Company except as are described in the Registration Statement; xviii. Counsel has no knowledge of any subsidiaries of the Company except as described in the Registration Statement; xix. Such counsel has not been informed that Company is a party to any agreement giving rise to any obligation by the Company or any subsidiary to pay any third-party royalties or fees of any kind whatsoever with respect to any technology developed, employed, used or licensed by the Company or any subsidiary, other than is disclosed in the Prospectus; xx. The Common Stock and Warrants are eligible for quotation on The Nasdaq SmallCap Market; 31 xxi. Such counsel has no reason to believe that issued and outstanding shares of Common Stock and all other securities issued and sold or exchanged by the Company or its subsidiaries have not been issued and sold or exchanged in compliance with all applicable state and federal securities laws and regulations; and xxii. Such counsel has not been informed that Company or any of its Property are not in compliance with any Environmental Laws or that the Company is not in full compliance with all permits, licenses and authorizations relating to Environmental Laws. In rendering such opinion, counsel for the Company may rely (A) as to matters involving the application of laws other than the laws of the United States and the laws of the State of Colorado, to the extent counsel for the Company deems proper and to the extent specified in such opinion, upon an opinion or opinions (in form and substance satisfactory to counsel for the Representative) of other counsel, acceptable to counsel for the Representative, familiar with the applicable laws, in which case the opinion of counsel for the Company shall state that the opinion or opinions of such other counsel are satisfactory in scope, form, and substance to counsel for the Company and that reliance thereon by counsel for the Company is reasonable; (B) as to matters of fact, to the extent the Representative deems proper, on certificates of responsible officers of the Company; and (C) to the extent they deem proper, upon written statements or certificates of officers of departments of various jurisdictions having custody of documents respecting the corporate existence or good standing of the Company, provided that copies of any such statements or certificates shall be delivered to counsel for the Representative. c. On or prior to the Closing Date and any Additional Closing Date, as the case may be, you shall have been furnished such information, documents, certificates, and opinions as you may reasonably require for the purpose of enabling you to review the matters referred to in Section 7(b), and in order to evidence the accuracy, completeness, or satisfaction of any of the representations, warranties, covenants, agreements, or conditions herein contained, or as you may reasonably request. 32 d. At the Closing Date and any Additional Closing Date, as the case may be, you shall have received a certificate of the chief executive officer and of the chief financial officer of the Company, dated the Closing Date or such Additional Closing Date, as the case may be, to the effect that the conditions set forth in Section 7(a) have been satisfied, that as of the date of this Agreement and as of the Closing Date or such Additional Closing Date, as the case may be, the representations and warranties of the Company contained herein were and are accurate, and that as of the Closing Date or such Additional Closing Date, as the case may be, the obligations to be performed by the Company hereunder on or prior thereto have been fully performed. e. At the time this Agreement is executed and at the Closing Date and any Additional Closing Date, as the case may be, you shall have received a letter from HEIN + ASSOCIATES, LLP, Certified Public Accountants, addressed to you and dated the date of delivery but covering a period within three business days of such date, in form and substance satisfactory to you. f. All proceedings taken in connection with the issuance, sale, transfer, and delivery of the Common Stock and Warrants and the Additional Securities shall be satisfactory in form and substance to you and to counsel for the Representative, and you shall have received a favorable opinion from counsel to the Company, dated as of the Closing Date or the Additional Closing Date, as the case may be, with respect to such of the matters set forth under Section 7(b), and with respect to such other related matters, as you may reasonably request. g. The NASD, upon review of the terms of the public offering of the Common Stock and Warrants and the Additional Securities, shall not have objected to your participation in such offering. h. The Company shall have received notice that the Common Stock and Warrants will be quoted on the Nasdaq SmallCap Market as of the Effective Date. i. Prior to or simultaneously with the Closing hereunder, the Company shall have entered into a credit agreement with a commercial bank pursuant to which, and immediately upon Closing, at least $3.5 million will be loaned to the Company and used by the Company along with proceeds from the Closing hereunder to pay in full the 33 Dominion Michigan note of approximately $7 million in principal face amount. Such credit agreement shall provide for a term loan of at least $3.5 million repayable over at least four years. Any certificate or other document signed by any officer of the Company and delivered to you or to counsel for the Representative shall be deemed a representation and warranty by the Company hereunder to the Representative as to the statements made therein. If any condition to your obligations hereunder to be fulfilled prior to or at the Closing Date or any Additional Closing Date, as the case may be, is not so fulfilled, you may terminate this Agreement or, if you so elect, in writing waive any such conditions which have not been fulfilled or extend the time for their fulfillment. 8. Indemnification and Contribution. a. Subject to the conditions set forth below, the Company agrees to indemnify and hold harmless the Underwriters, the Representative, and each of their officers, directors, partners, employees, agents, and counsel, and each person, if any, who controls the Representative or any one of the Underwriters within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against any and all loss, liability, claim, damage, and expense whatsoever (which shall include, for all purposes of this Section 8, but not be limited to, attorneys' fees and any and all expense whatsoever incurred in investigating, preparing, or defending against any litigation, commenced or threatened, or any claim whatsoever and any and all amounts paid in settlement of any claim or litigation) as and when incurred arising out of, based upon, or in connection with (i) any untrue statement or alleged untrue statement of a material fact contained (A) in any Preliminary Prospectus, the Registration Statement, or the Prospectus (as from time to time amended and supplemented), or any amendment or supplement thereto, or (B) in any application or other document or communication (in this Section 8 collectively called an "application") in any jurisdiction in order to qualify the Common Stock and Warrants and Additional Securities under the "blue sky" or securities laws thereof or filed with the Commission or any securities exchange; or any omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or (ii) any breach of any representation, warranty, covenant, or agreement of 34 the Company contained in this Agreement. The foregoing agreement to indemnify shall be in addition to any liability the Company may otherwise have, including liabilities arising under this Agreement; however, the Company shall have no liability under this Section 8 if such statement or omission was made in reliance upon and in conformity with written information furnished to the Company as stated in Section 8(b) with respect to the Underwriters by or on behalf of the Underwriters expressly for inclusion in any Preliminary Prospectus, the Registration Statement, or the Prospectus, or any amendment or supplement thereto, or in any application, as the case may be. If any action is brought against the Underwriters, the Representative or any of their officers, directors, partners, employees, agents, or counsel, or any controlling persons of an Underwriter or the Representative (an "indemnified party") in respect of which indemnity may be sought against the Company pursuant to the foregoing paragraph, such indemnified party or parties shall promptly notify the Company in writing of the institution of such action (but the failure so to notify shall not relieve the Company from any liability it may have other than pursuant to this Section 8(a)) and the Company shall promptly assume the defense of such action, including the employment of counsel (satisfactory to such indemnified party or parties) and payment of expenses. Such indemnified party or parties shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such indemnified party or parties unless the employment of such counsel shall have been authorized in writing by the Company in connection with the defense of such action or the Company shall not have promptly employed counsel satisfactory to such indemnified party or parties to have charge of the defense of such action or such indemnified party or parties shall have reasonably concluded that there may be one or more legal defenses available to it or them or to other indemnified parties which are different from or additional to those available to the Company, in any of which events such fees and expenses shall be borne by the Company. Anything in this paragraph to the contrary notwithstanding, the Company shall not be liable for any settlement of any such claim or action effected without its written consent. The Company agrees promptly to notify the Underwriters and the Representative of the commencement of any litigation or 35 proceedings against the Company or against any of its officers or directors in connection with the sale of the Common Stock and Warrants or the Additional Securities, any Preliminary Prospectus, the Registration Statement, or the Prospectus, or any amendment or supplement thereto, or any application. b. The Underwriters agree to indemnify and hold harmless the Company, each director of the Company, each officer of the Company who shall have signed the Registration Statement, each other person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, to the same extent as the foregoing indemnity from the Company to the Underwriters in Section 8(a), but only with respect to statements or omissions, if any, made in any Preliminary Prospectus, the Registration Statement, or the Prospectus (as from time to time amended and supplemented), or any amendment or supplement thereto, or in any application, in reliance upon and in conformity with written information furnished to the Company as stated in this Section 8(b) with respect to the Underwriters by or on behalf of the Underwriters expressly for inclusion in any Preliminary Prospectus, the Registration Statement, or the Prospectus, or any amendment or supplement thereto, or in any application, as the case may be; provided, however, that the obligation of the Underwriters to provide indemnity under the provisions of this Section 8(b) shall be limited to the amount which represents the product of the number of shares of Common Stock and Warrants and Additional Securities sold hereunder and the initial public offering prices per share of Common Stock and Warrant set forth on the cover page of the Prospectus. For all purposes of this Agreement, the amounts of the selling concession and reallowance set forth in the Prospectus, the information under "Underwriting" and the identification of counsel to the Representative under "Legal Matters" constitute the only information furnished in writing by or on behalf of the Underwriters expressly for inclusion in any Preliminary Prospectus, the Registration Statement, or the Prospectus (as from time to time amended or supplemented), or any amendment or supplement thereto, or in any application, as the case may be. If any action shall be brought against the Company or any other person so indemnified based on any Preliminary Prospectus, the Registration Statement or the Prospectus, or any amendment or supplement thereto, or 36 any application, and in respect of which indemnity may be sought against the Underwriters pursuant to this Section 8(b), the Underwriters shall have the rights and duties given to the Company, and the Company and each other person so indemnified shall have the rights and duties given to the indemnified parties, by the provisions of Section 8(a). c. In order to provide for just and equitable contribution in circumstances in which the indemnity agreement provided for in this Section 8 is for any reason held to be unavailable to the Underwriters or the Company, then the Company shall contribute to the damages paid by the several Underwriters, and the several Underwriters shall contribute to the damages paid by the Company; provided, however, that no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. In determining the amount of contribution to which the respective parties are entitled, there shall be considered the relative benefits received by each party from the sale of the Common Stock and Warrants and Additional Securities (taking into account the portion of the proceeds of the offering realized by each), the parties' relative knowledge and access to information concerning the matter with respect to which the claim was asserted, the opportunity to correct and prevent any statement or omission, and any other equitable considerations appropriate in the circumstances. The Company and the Underwriters agree that it would not be equitable if the amount of such contribution were determined by pro rata or per capita allocation (even if the Underwriters were treated as one entity for such purpose). No Underwriter or person controlling such Underwriter shall be obligated to make contribution hereunder which in the aggregate exceeds the total public offering price of the Common Stock and Warrants and Additional Securities purchased by such Underwriter under this Agreement, less the aggregate amount of any damages which such Underwriter and its controlling persons have otherwise been required to pay in respect of the same or any substantially similar claim. The Underwriters' obligations to contribute hereunder are several in proportion to their respective underwriting obligations and not joint. For purposes of this Section, each person, if any, who controls an Underwriter within the meaning of Section 15 of the Act 37 shall have the same rights to contribution as such Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the Act, shall have the same rights to contribution as the Company. Anything in this Section 8(c) to the contrary notwithstanding, no party shall be liable for contribution with respect to the settlement of any claim or action effected without its written consent. This Section 8(c) is intended to supersede any right to contribution under the Act, the Exchange Act, or otherwise. 9. Representations and Agreements to Survive Delivery. All representations, warranties, covenants, and agreements contained in this Agreement shall be deemed to be representations, warranties, covenants, and agreements at the Closing Date and any Additional Closing Date, and such representations, warranties, covenants, and agreements of the Underwriters and the Company, including the indemnity and contribution agreements contained in Section 8, shall remain operative and in full force and effect regardless of any investigation made by or on behalf of the Representative, the Underwriters or any indemnified person, or by or on behalf of the Company or any person or entity which is entitled to be indemnified under Section 8(b), and shall survive termination of this Agreement or the delivery of the Common Stock and Warrants and the Additional Securities to the Underwriters for a period equal to the statute of limitations for claims related hereto, but not to exceed an aggregate of three years from the date hereof. In addition, the provisions of Sections 5(a), 6, 8, 9, 10, and 12 shall survive termination of this Agreement, whether such termination occurs before or after the Closing Date or any Additional Closing Date. 38 10. Effective Date of This Agreement and Termination Thereof. a. This Agreement shall be executed within 24 hours of the Effective Date of the Registration Statement and shall become effective on the Effective Date or at the time of the initial public offering of the Common Stock and Warrants, whichever is earlier. The time of the initial public offering shall mean the time, after the Registration Statement becomes effective, of the release by the Representative for publication of the first newspaper advertisement which is subsequently published relating to the Common Stock and Warrants or the time, after the Registration Statement becomes effective, when the Common Stock and Warrants are first released by the Representative for offering by dealers by letter or telegram, whichever shall first occur. The Representative or the Company may prevent this Agreement from becoming effective without liability of any party to any other party, except as noted below in this Section 10, by giving the notice indicated in Section 10(c) before the time this Agreement becomes effective. b. The Representative shall have the right to terminate this Agreement at any time prior to the Closing Date or any Additional Closing Date, as the case may be, by giving notice to the Company if there shall have been a general suspension of, or a general limitation on prices for, trading in securities on the New York Stock Exchange or the American Stock Exchange or in the over-the-counter market; or if there shall have been an outbreak of major hostilities or other national or international calamity, or terrorist activity, that causes significant disruption in the financial markets; or if a banking moratorium has been declared by a state or federal authority; or if a moratorium in foreign exchange trading by major international banks or persons has been declared; or if there shall have been a material interruption in the mail service or other means of communication within the United States; or if the Company shall have sustained a material or substantial loss by fire, flood, accident, hurricane, earthquake, theft, sabotage, or other calamity or malicious act which, whether or not such loss shall have been insured, will, in the Representative's opinion, make it inadvisable to proceed with the offering, sale, or delivery of the Common Stock and Warrants or the Additional Securities, as the case may be; or if there shall have been such material and adverse change in the market for securities in general so as to make it inadvisable to proceed with 39 the offering, sale, and delivery of the Common Stock and Warrants or the Additional Securities, as the case may be, on the terms contemplated by the Prospectus due to the impaired investment quality of the Common Stock and Warrants or the Additional Securities; or if the Dow Jones Industrial Average shall have fallen by 15% or more from its closing price on the day immediately preceding the date that the Registration Statement is declared effective by the Commission. c. If the Representative elects to prevent this Agreement from becoming effective as provided in this Section 10, or to terminate this Agreement, it shall notify the Company promptly by telephone or facsimile, confirmed by letter. If, as so provided, the Company elects to prevent this Agreement from becoming effective, the Company shall notify the Representative promptly by telephone or facsimile, confirmed by letter. d. Anything in this Agreement to the contrary notwithstanding other than Section 10(e), if this Agreement shall not become effective by reason of an election pursuant to this Section 10 or if this Agreement shall terminate or shall otherwise not be carried out prior to September 30, 2002 because (i) of any reason solely within the control of the Company or its stockholders and not due to the breach of any representation, warranty or covenant or bad faith of the Representative, (ii) the Company unilaterally withdraws the proposed Public Offering from the Representative in favor of another underwriter, (iii) the Company does not permit the Registration Statement to become effective for any reason other than if the Common Stock is proposed to be priced at less than $5.00 per share, in which event this provision will not apply, (iv) of any material discrepancy in any representation by the Company and/or its officers, directors, stockholders, agents, advisers or representatives, made in writing, including but not limited to the Registration Statement, to the Representative, (v) the Company is, directly and/or indirectly, negotiating with other persons or entities of whatsoever nature relating to a possible Public Offering of its securities, or (vi) of any failure on the part of the Company to perform any covenant or agreement or satisfy any condition of this Agreement by it to be performed or satisfied, then, in any of such events, the Company shall be obligated to reimburse the Representative for its out-of-pocket expenses on an accountable basis. Should the Representative be required to account for "out-of-pocket" 40 expenses, any expense incurred by the Representative shall be deemed to be reasonable and unobjectionable upon a reasonable showing by the Representative that such expenses were incurred, directly or indirectly, in connection with the proposed transaction and/or relationship of the parties hereto, as described herein. In no event will the Representative be entitled to reimbursement of accountable expenses exceeding $70,000, inclusive of the $40,000 advanced against the non-accountable expense allowance. e. Notwithstanding any election hereunder or any termination of this Agreement, and whether or not this Agreement is otherwise carried out, the provisions of Sections 5(a), 6, 8, 9, and 10 shall not be in any way affected by such election or termination or failure to carry out the terms of this Agreement or any part hereof. f. Anything in this Agreement to the contrary notwithstanding other than Sections 10(d) and (e), if this Agreement shall not be carried out within the time specified herein for any reason other than as set forth in Section 10(d), the Company shall have no liability to the Representative other than for the Representative's accountable expenses up to a maximum aggregate amount of $40,000, which amount has been paid in advance in accordance with Section 6 hereof. 11. Notices. All communications hereunder, except as may be otherwise specifically provided herein, shall be in writing and, if sent to the Representative, shall be mailed, delivered, or sent by facsimile transmission and confirmed by original letter, to Neidiger, Tucker, Bruner, Inc., 1675 Larimer Street, Suite 300, Denver, Colorado 80202, Attention: Anthony B. Petrelli, with a copy to Samuel E. Wing, Jones & Keller, P.C., 1625 Broadway, Suite 1600, Denver, Colorado 80202; or if sent to the Company shall be mailed, delivered, or telexed or telegraphed and confirmed by letter, to Natural Gas Services Group, Inc., 2911 South County Road 1260, Midland, Texas 79706, Attention: Wayne L. Vinson, President, with a copy to Thomas S. Smith, Esq., Dorsey & Whitney LLP, 370 17th Street, Suite 4700, Denver, Colorado 80202. All notices hereunder shall be effective upon receipt by the party to which it is addressed. 12. Parties. This Agreement shall inure solely to the benefit of, and shall be binding upon, the Underwriters, the Company, and the persons and entities referred to in Section 8 who are entitled to indemnification or contribution, and their respective successors, legal representatives, and assigns (which shall not include any buyer, as such, of the Common Stock 41 and Warrants or the Additional Securities) and no other person shall have or be construed to have any legal or equitable right, remedy, or claim under or in respect of or by virtue of this Agreement or any provision herein contained. 13. Construction. This Agreement shall be construed in accordance with the laws of the State of Colorado, without giving effect to conflict of laws. Time is of the essence in this Agreement. The parties acknowledge that this Agreement was initially prepared by the Representative, and that all parties have read and negotiated the language used in this Agreement. The parties agree that, because all parties participated in negotiating and drafting this Agreement, no rule of construction shall apply to this Agreement which construes ambiguous language in favor of or against any party by reason of that party's role in drafting this Agreement. If the foregoing correctly sets forth the understanding between us, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement between us. Very truly yours, NATURAL GAS SERVICES GROUP, INC. By: -------------------------- Wayne L. Vinson, President Accepted as of the date first above written. Denver, Colorado NEIDIGER, TUCKER, BRUNER, INC. By: ----------------------------------- Anthony B. Petrelli, Vice President 42 NATURAL GAS SERVICES GROUP, INC. (A COLORADO CORPORATION) SCHEDULE 1 This Schedule sets forth the name of each Underwriter referred to in the Underwriting Agreement and the number of shares of Common Stock and Warrants to be sold by the Company.
NUMBER OF SHARES OF NUMBER OF NAME COMMON STOCK WARRANTS ---- ------------ --------- Neidiger, Tucker, Bruner, Inc. ------------ --------- Total 1,650,000 1,650,000 ============ =========
EX-1.2 4 d96705a1exv1w2.txt FORM OF SELECTED DEALERS AGREEMENT EXHIBIT 1.2 SELECTED DEALERS AGREEMENT PUBLIC OFFERING OF 1,650,000 SHARES OF COMMON STOCK 1,650,000 REDEEMABLE WARRANTS OFFERING PRICE OF $______ PER SHARE AND $.25 PER WARRANT NATURAL GAS SERVICES GROUP, INC. JULY ____, 2002 Neidiger, Tucker, Bruner, Inc., on behalf of itself and other underwriters (the "Underwriters") for which it is the representative (the "Representative"), has severally agreed with Natural Gas Services Group, Inc., a Colorado corporation (the "Company"), to purchase 1,650,000 shares (the "Firm Shares") of common stock (the "Common Stock") and 1,650,000 redeemable warrants (the "Firm Warrants"; together with the Firm Shares, the "Firm Securities") of the Company, and the Representative has been granted the right to purchase up to an additional 247,500 shares and/or warrants (the "Additional Securities") at its option for the sole purpose of covering over-allotments in the sale of the Firm Shares (the Firm Securities and Additional Securities being collectively referred to as the "Securities" or a "Security"). The Underwriters are offering the Securities to the public at an offering price of $_______ per Firm Share and $.2275 per Firm Warrant. Although the Firm Shares and Firm Warrants are not being sold as Units, you must sell an equal number of both. Certain other capitalized terms used herein are defined in the Underwriting Agreement and are used herein as therein defined. The Representative is offering the Securities to certain selected dealers (the "Selected Dealers"), when, as and if accepted by the Representative and subject to withdrawal, cancellation or modification of the offer without notice and further subject to the terms of (i) the Company's current Prospectus, (ii) the Underwriting Agreement, (iii) this Agreement, and (iv) the Representative's instructions which may be forwarded to the Selected Dealer from time to time. A copy of the Underwriting Agreement will be delivered to you forthwith for inspection or copying or both, upon your request therefor. This invitation is made by the Representative only if the Securities may be offered lawfully to dealers in your state. The further terms and conditions of this invitation are as follows: 1. Acceptance of Orders. Orders received by the Representative from the Selected Dealer will be accepted only at the price, in the amounts and on the terms which are set forth in the Company's current Prospectus, subject to allotment in the Representative's uncontrolled discretion. The Representative reserves the right to reject any orders, in whole or in part. 2. Selling Concession. As a Selected Dealer, you will be allowed on all Securities purchased by you, which the Underwriters have not repurchased or contracted to repurchase prior to termination of this Agreement at or below the public offering price, a concession of _______% of the full 9% Underwriting discount, i.e., $_________ per Firm Share and $_____ per Firm Warrant as shown in the Company's current Prospectus. No selling concession will be allowed to any domestic broker-dealer who is not a member of the National Association of Securities Dealers, Inc. (the "Association"), or to any foreign broker-dealer eligible for membership in the Association who is not a member of the Association. Payment of such selling concession to you will be made only as provided in Section 4 hereof. After the Securities are released for sale to the public, the Representative is authorized to, and may, change the public offering price and the selling concession. 3. Reoffer of Securities. Securities purchased by you are to be bona fide reoffered by you in conformity with this Agreement and the terms of offering set forth in the Prospectus. You agree that you will not bid for, purchase, attempt to induce others to purchase, or sell, directly or indirectly, any Securities except as contemplated by this Agreement and except as a broker pursuant to unsolicited orders. You confirm that you have complied and agree that you will at all times comply with the provisions of Regulation M of the Securities Exchange Act of 1934, as amended (the "Exchange Act") applicable to this offering. In respect of Securities sold by you and thereafter purchased by the Representative at or below the public offering price prior to the termination of this Agreement as described hereinafter (or such longer period as may be necessary to cover any short position with respect to the offering), you agree at the Representative's option either to repurchase the Securities at a price equal to the cost thereof to 2 the Representative, including commissions and transfer taxes on redelivery, or to repay the Representative such part of your Selected Dealers' concessions on such Securities as the Representative designates. 4. Payment for Securities. Payment for the Securities purchased by you is to be made at the net Selected Dealers' price of $_____ per Firm Share and $_____ per Firm Warrant, at the offices of Neidiger, Tucker, Bruner, Inc., 1825 Lawrence Street, Suite 300, Denver, Colorado 80202, Denver, Colorado 80203, Attention: Syndicate Department, at such time and on such date as the Representative may designate, by certified or official bank check, payable in clearing house funds to the order of the Representative, against delivery of certificates for the Securities so purchased. If such payment is not made at such time and on such date, you agree to pay the Representative interest on such funds at the current interest rates. The Representative may in its discretion deliver the Securities purchased by you through the facilities of the Depository Trust Company or, if you are not a member, through your ordinary correspondent who is a member unless you promptly give the Representative written instructions otherwise. 5. Offering Representations. The Representative has been informed that a Registration Statement in respect of the Securities is expected to become effective under the Securities Act of 1933, as amended (the "Act"). You are not authorized to give any information or to make any representations other than those contained in the Prospectus or to act as agent for the Company or for the undersigned when offering the Securities to the public or otherwise. 6. Blue Sky. Neither the Representative nor the Underwriters assume any responsibility or obligations as to your right to sell the Securities in any jurisdiction, notwithstanding any information furnished in that connection. The Selected Dealer shall report in writing to the Representative the number of Securities which have been sold by it in each state and the number of transactions made in each such state. This state report shall be submitted to the Representative as soon as possible after completion of billing, but in any event not more than three days after the closing. 3 7. Dealer Undertakings. By accepting this Agreement, the Selected Dealer in offering and selling the Securities in the Public Offering (i) acknowledges its understanding of, and undertakes to comply with, (a) the Conduct Rules (the "Rules") of the Association and the interpretations of such Rules promulgated by the Board of Governors of the Association (the "Interpretations") including, but not limited to the Rule and Interpretation with respect to "Free-Riding and Withholding" defined therein, (b) Rule 174 of the rules and regulations promulgated under the Act, (c) Regulation M promulgated under the Exchange Act, (d) Release No. 3907 under the Act, (e) Release No. 4150 under the Act, and (f) Sections 2410-2460 and 2710-2780 of the Rules and Interpretations thereunder, and (ii) represents, warrants, covenants and agrees that it shall comply with all applicable requirements of the Act and the Exchange Act in addition to the specific provisions cited in subparagraph (i) above and that it shall not violate, directly or indirectly, any provision of applicable law in connection with its participation in the Public Offering of the Securities. 8. Conditions of Public Offering. All sales shall be subject to delivery by the Company of certificates evidencing the Securities against payment therefor. 9. Failure of Order. If an order is rejected or if a payment is received which proves insufficient or worthless, any compensation paid to the Selected Dealer shall be returned by (i) restoration by the Representative to the Selected Dealer of the latter's remittance or (ii) a charge against the account of the Selected Dealer with the Representative, as the latter may elect without notice being given of such election. 10. Additional Representations, Covenants and Warranties of Selected Dealer. By accepting this Agreement, the Selected Dealer represents that it is registered as a broker-dealer under the Exchange Act; is qualified to act as a dealer in the states or the jurisdictions in which it shall offer the Securities; is a member in good standing of the Association; and shall maintain such registrations, qualifications and membership in full force and effect and in good standing throughout the term of this Agreement. If the Selected Dealer is not a member of the Association, it represents that it is a foreign dealer not registered under the Exchange Act and 4 agrees to make no sales within the United States, its territories or its possessions or to persons who are citizens thereof or residents therein, and in making any sales to comply with the Association's Rules and Interpretations with respect to Free-Riding and Withholding. Further, the Selected Dealer agrees to comply with all applicable federal laws including, but not limited to, the Act and Exchange Act and the rules and regulations of the Commission thereunder; the laws of the states or other jurisdictions in which Securities may be offered or sold by it; and the Constitution, Bylaws, and rules of the Association. Further, the Selected Dealer agrees that it will not offer or sell the Securities in any state or jurisdiction except those in which the Securities have been qualified or qualification is not required. The Selected Dealer acknowledges its understanding that it shall not be entitled to any compensation hereunder for any period during which it has been suspended or expelled from membership in the Association. 11. Employees and other Agents of the Selected Dealer. By accepting this Agreement, the Selected Dealer assumes full responsibility for thorough and proper training of its employees and other agents and representatives concerning the selling methods to be used in connection with the Public Offering of the Securities, giving special emphasis to the principles of full and fair disclosure to prospective investors and the prohibitions against "Free-Riding and Withholding" as set forth in Section 2110 of the Rules and the Interpretations thereunder. 12. Indemnification by the Company. The Company has agreed in Section 8 of the Underwriting Agreement to indemnify and hold harmless the Underwriters, the Representative and each person if any, who controls the Representative or any one of the Underwriters within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act against any and all loss, liability, claim, damage, and expense whatsoever (which shall include, for all purposes of Section 8 of the Underwriting Agreement, but not be limited to, attorneys' fees and any and all expense whatsoever incurred in investigating, preparing, or defending against any litigation, commenced or threatened, or any claim whatsoever and any and all amounts paid in settlement of any claim or litigation) as and when incurred arising out of, based upon, or in connection with (i) any untrue statement or alleged untrue statement of a material fact contained (A) in any Preliminary Prospectus, the Registration Statement, or the Prospectus (as from time to time 5 amended and supplemented), or any amendment or supplement thereto, or (B) in any application or other document or communication (in the Underwriting Agreement collectively called an "application") in any jurisdiction in order to qualify the Securities under the "blue sky" or securities laws thereof or filed with the Commission or any securities exchange; or any omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or (ii) any breach of any representation, warranty, covenant, or agreement of the Company contained in the Underwriting Agreement. The Representative has agreed to give the Company an opportunity and the right to participate in the defense or preparation of the defense of any action brought against the Representative, any Underwriter or any controlling person thereof to enforce any such loss, claim, demand, liability or expense. The agreement of the Company under this indemnity is conditioned upon notice of any such action having been promptly given by the indemnified party to the Company. Failure to notify the Company as provided in the Underwriting Agreement shall not relieve the Company of its liability which it may have to the Representative, the Underwriters, or any controlling person thereof other than pursuant to Section 8(a) of the Underwriting Agreement. This agreement is subject in all respects, especially insofar as the foregoing description of the indemnification provisions set forth in the Underwriting Agreement is concerned, to the terms and provisions of the Underwriting Agreement, a copy of which will be made available for inspection or copying or both to the Selected Dealer upon written request to the Representative therefor. The Selected Dealer acknowledges and confirms that, by signing a counterpart of this Agreement, it shall be deemed an agent of the Underwriters or a "Representative" for all purposes of Section 8 of the Underwriting Agreement, as expressly set forth therein. 13. Indemnification by the Selected Dealer. The Selected Dealer shall indemnify and hold harmless the Company, each director of the Company, each officer of the Company who shall have signed the Registration Statement, each other person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, to the same extent as the indemnity from the Company to the Underwriters in Section 8(a) of the Underwriting Agreement, but only with respect to statements or omissions, if any, made in any Preliminary Prospectus, the Registration Statement, or the Prospectus (as from time to time 6 amended and supplemented), or any amendment or supplement thereto, or in any application, in reliance upon and in conformity with information furnished to the Representative or the Company with respect to the Selected Dealer by or on behalf of the Selected Dealer expressly for inclusion in any Preliminary Prospectus, the Registration Statement, or the Prospectus, or any amendment or supplement thereto, or in any application, as the case may be, or are based upon alleged misrepresentations or omissions to state material facts in connection with statements made by the Selected Dealer or the Selected Dealer's employees or other agents to the Company or the Representative orally or by any other means; provided, however, that the obligation of the Selected Dealer to provide indemnity hereunder shall be limited to the amount which represents the product of the number of Firm Securities and Additional Securities sold by the Selected Dealers and the initial public offering price per Security set forth on the cover page of the Prospectus. If any action shall be brought against the Company or any other person so indemnified in respect of which indemnity may be sought against the Selected Dealer pursuant to this provision, the Selected Dealer shall have the rights and duties given to the Company in the Underwriting Agreement, and the Company and each other person so indemnified shall have the rights and duties given to the indemnified parties, by the provisions of Section 8(a) of the Underwriting Agreement; and the Selected Dealer shall reimburse the Company and the Representative for any legal or other expenses reasonably incurred by them in connection with the investigation of or the defense of any such action or claim. The Representative shall, after receiving the first summons or other legal process disclosing the nature of the action being brought against it or the Company in any proceeding with respect to which indemnity may be sought by the Company or the Representative hereunder, notify promptly the Selected Dealer in writing of the commencement thereof; and the Selected Dealer shall be entitled to participate in (and, to the extent the Selected Dealer shall wish, to direct) the defense thereof at the expense of the Selected Dealer, but such defense shall be conducted by counsel satisfactory to the Company and the Representative. If the Selected Dealer shall fail to provide such defense, the Company or the Representative may defend such action at the cost and expense of the Selected Dealer. The Selected Dealer's obligation under this Section 13 shall survive any termination of this Agreement, the Underwriting Agreement and the delivery of and payment for the Securities under the Underwriting Agreement, and shall remain in full force and effect regardless of the 7 investigation made by or on behalf of any Representative within the meaning of Section 15 of the Act. 14. No Authority to Act as Partner or Agent. Nothing herein shall constitute the Selected Dealers as an association or other separate entity or partners with or agents of the Representative or with each other, but each Selected Dealer shall be responsible for its pro rata share of any liability or expense based upon any claims to the contrary. The Representative shall not be under any liability for or in respect of the value, validity or form of the Securities, or the delivery of certificates for the Securities or the performance by any person of any agreement on its part, or the qualification of the Securities for sale under the laws of any jurisdiction, or for or in respect of any matter in connection with this Agreement, except for lack of good faith and for obligations expressly assumed by the Representative in this Agreement. 15. Expenses. No expenses incurred in connection with offers and sales of the Securities under the Public Offering will be chargeable to the Selected Dealers. A single transfer tax, if any, on the sale of Securities by the Selected Dealer to its customers will be paid when such Securities are delivered to the Selected Dealer for delivery to its customers. Notwithstanding the foregoing, the Selected Dealer shall pay its proportionate share of any transfer tax or any other tax (other than the single transfer tax described above) if any such tax shall at any time be assessed against the Representative and other Selected Dealers. 16. Notices. All notices, demands or requests required or authorized hereunder shall be deemed given sufficiently if in writing and sent by registered or certified mail, return receipt requested and postage prepaid, or by tested telex, telegram, cable or facsimile to, in the case of the Representative, the address set forth above directed to the attention of the President of the Representative, and in the case of the Selected Dealer, to the address provided below by the Selected Dealer, directed to the attention of the President. 17. Termination. This Agreement may be terminated by the Representative with or without cause upon written notice to the Selected Dealer to such effect; and such notice having 8 been given, this Agreement shall terminate at the time specified therein. Additionally, this Agreement shall terminate upon the earlier of the termination of the Underwriting Agreement, or at the close of business sixty days after the Securities are released by the Representative for sale to the public. 18. General Provisions. This Agreement shall be construed and enforced in accordance with and governed by the laws of the State of Colorado. This Agreement embodies the entire agreement and understanding between the Representative and the Selected Dealer and supersedes all prior agreements and understandings related to the subject matter hereof, and this Agreement may not be modified or amended or any term or provision hereof waived or discharged except in writing signed by the party against whom such amendment, modification, waiver or discharge is sought to be enforced. All the terms of this Agreement, whether so expressed or not, shall be binding upon, and shall inure to the benefit of, the respective successors, legal representatives and assigns of the parties hereto; provided, however, that none of the parties hereto can assign this Agreement or any of its rights hereunder without the prior written consent of the other party hereto, and any such attempted assignment or transfer without the other party's prior written consent shall be void and without force or effect. The headings of this Agreement are for purposes of reference only and shall not limit or otherwise affect the meaning hereof. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument. If the foregoing correctly sets forth the terms and conditions of your agreement to purchase the Securities allotted to you, please indicate your acceptance thereof by signing and returning to Neidiger, Tucker, Bruner, Inc. the duplicate copy of this Agreement, whereupon this letter and your acceptance shall become and evidence a binding contract between you and the Representative. NEIDIGER, TUCKER, BRUNER, INC. By: ------------------------------ Title: --------------------------- 9 Gentlemen: The undersigned confirms its agreement to purchase __________ shares of Common Stock and __________ Warrants of Natural Gas Services Group, Inc., upon the terms and subject to the conditions of the foregoing Selected Dealers Agreement, and further agrees that any agreement by it to purchase additional Securities during the life of such Agreement will be upon the same terms and subject to the same conditions. The undersigned acknowledges receipt of the Prospectus relating to the public offering of the Securities and confirms that in agreeing to purchase such Securities it has relied on such Prospectus and not on any other statement whatsoever written or oral. Firm Name: ------------------------------------------ (Print or Type name of Firm) By: ------------------------------------------------- (Authorized Agent) (Print or Type Name and Title of Authorized Agent) Address: -------------------------------------------- Telephone No.: -------------------------------------- IRS Employer Identification No.: -------------------- Dated: , 2002 -------------------- 10 EX-4.4 5 d96705a1exv4w4.txt FORM OF OPTION FOR PURCHASE OF COMMON STOCK EXHIBIT 4.4 THE REPRESENTATIVE'S OPTION EVIDENCED AND REPRESENTED BY THIS CERTIFICATE (THE "REPRESENTATIVE'S OPTION") AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF (THE "OPTION SHARES") HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, PURSUANT TO A REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AND WITH THE SECURITIES ADMINISTRATORS OF CERTAIN STATES UNDER THE SECURITIES ("BLUE SKY") LAWS OF SUCH STATES. HOWEVER, NEITHER THE REPRESENTATIVE'S OPTION NOR THE UNDERLYING COMMON STOCK MAY BE SOLD, TRANSFERRED, PLEDGED, OR HYPOTHECATED EXCEPT PURSUANT TO (i) A POST-EFFECTIVE AMENDMENT TO SUCH REGISTRATION STATEMENT, (ii) A SEPARATE REGISTRATION STATEMENT UNDER SUCH ACT, OR (iii) AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND UNDER THE APPLICABLE BLUE SKY LAWS. THIS REPRESENTATIVE'S OPTION MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED EXCEPT AS OTHERWISE PROVIDED HEREIN AND THE HOLDER OF THIS REPRESENTATIVE'S OPTION, BY ITS ACCEPTANCE HEREOF, AGREES THAT IT WILL NOT SELL, TRANSFER OR ASSIGN THIS REPRESENTATIVE'S OPTION EXCEPT AS OTHERWISE PROVIDED HEREIN. NATURAL GAS SERVICES GROUP, INC. REPRESENTATIVE'S OPTION FOR THE PURCHASE OF COMMON STOCK NO. UW-001 165,000 REPRESENTATIVE'S OPTIONS THIS CERTIFIES that, for receipt in hand of $50 and other value received, NEIDIGER, TUCKER, BRUNER, INC. (the "Holder"), is entitled to subscribe for and purchase from NATURAL GAS SERVICES GROUP, INC., a Colorado corporation (the "Company"), upon the terms and conditions set forth herein, at any time, or from time to time, after _________, 2003, and before 5:00 p.m. Colorado time on __________, 2007 (the "Exercise Period"), 165,000 shares of Common Stock (the "Option Shares"), at a price of $_________ per Option Share (the "Exercise Price"), or 125% of the offering price of Common Stock to be sold by the Company in a public offering under Registration Statement Form SB-2, No. 333-88314 (the "Public Offering") at or prior to the date hereof. The term the "Holder" as used herein shall include any transferee to whom this Representative's Option has been transferred in accordance with the terms of this Representative's Option. As used herein the term "this Representative's Option" shall mean and include this Representative's Option and any Representative's Option or Representative's Options hereafter issued as a consequence of the exercise or transfer of this Representative's 1 Option in whole or in part, and the term "Common Stock" shall mean and include the Company's Common Stock with ordinary voting power, which class at the date hereof is publicly traded. 1. This Representative's Option may not be sold, transferred, assigned, pledged or hypothecated until ________, 2003 (one year after the effective date of the registration statement on which it is initially registered) except that it may be transferred, in whole or in part, (i) to one or more officers or partners of the Holder (or the officers or partners of any such partner); (ii) to a member of the underwriting syndicate and/or its officers or partners; (iii) by reason of reorganization of the Company; or (iv) by operation of law. After _________, 2003, this Representative's Option may be sold, transferred, assigned or hypothecated in accordance with applicable law. 2. (a) This Representative's Option may be exercised during the Exercise Period as to the whole or any lesser number of Option Shares, by the surrender of this Representative's Option (with the election attached hereto duly executed) to the Company at its office at 2911 South County Road 1260, Midland, Texas 79706, or such other place as is designated in writing by the Company, together with a certified or bank cashier's check payable to the order of the Company in an amount equal to the Exercise Price multiplied by the number of Option Shares for which this Representative's Option is being exercised. (b) Upon written request of the Holder, and in lieu of payment for the Option Shares by check in accordance with paragraph 2(a) hereof, the Holder may exercise the Representative's Option (or any portion thereof) for and receive the number of Option Shares equal to a fraction, the numerator of which equals (i) the amount by which the Current Market Price of the Common Stock for the ten (10) trading days preceding the date of exercise exceeds the Exercise Price per Share, multiplied by (ii) the number of Option Shares to be purchased; the denominator of which equals the Current Market Price. (c) For the purposes of any computation under this Representative's Option, the "Current Market Price" at any date shall be the closing price of the Common Stock on 2 the business day next preceding the event requiring an adjustment hereunder. If the principal trading market for such securities is an exchange, the closing price shall be the reported last sale price on such exchange on such day provided if trading of such Common Stock is listed on any consolidated tape, the closing price shall be the reported last sale price set forth on such consolidated tape. If the principal trading market for such securities is the over-the-counter market, the closing price shall be the last reported sale price on such date as set forth by The Nasdaq Stock Market, Inc., or, if the security is not quoted on such market, the average closing bid and asked prices as set forth in the National Quotation Bureau pink sheet or the Electronic Bulletin Board System for such day. Notwithstanding the foregoing, if there is no reported last sale price or average closing bid and asked prices, as the case may be, on a date prior to the event requiring an adjustment hereunder, then the current market price shall be determined as of the latest date prior to such day for which such last sale price or average closing bid and asked price is available. 3. Upon each exercise of this Representative's Option, the Holder shall be deemed to be the holder of record of the Option Shares issuable upon such exercise, notwithstanding that the transfer books of the Company shall then be closed or certificates representing such Option Shares shall not then have been actually delivered to the Holder. As soon as practicable after each such exercise of this Representative's Option, the Company shall issue and deliver to the Holder a certificate or certificates for the Option Shares issuable upon such exercise, registered in the name of the Holder or its designee. If this Representative's Option should be exercised in part only, the Company shall, upon surrender of this Representative's Option for cancellation, execute and deliver a new Representative's Option evidencing the right of the Holder to purchase the balance of the Option Shares (or portions thereof) subject to purchase hereunder. 4. The Representative's Option shall be registered in a Representative's Option Register as they are issued. The Company shall be entitled to treat the registered holder of any Representative's Option on the Representative's Option Register as the owner in fact thereof for all purposes and shall not be bound to recognize any equitable or other claim to or interest in such Representative's Option on the part of any other person. The Representative's Option shall be transferable only on the books of the Company upon delivery thereof duly endorsed by the 3 Holder or by his duly authorized attorney or representative, or accompanied by proper evidence of succession, assignment or authority to transfer. In all cases of transfer by an attorney, executor, administrator, guardian or other legal representative, duly authenticated evidence of his or its authority shall be produced. Upon any registration of transfer, the Company shall deliver a new Representative's Option or Representative's Options to the person entitled thereto. The Representative's Option may be exchanged, at the option of the Holder thereof, for another Representative's Option, or other Representative's Option of different denominations, of like tenor and representing in the aggregate the right to purchase a like number of Option Shares (or portions thereof) upon surrender to the Company or its duly authorized agent. Notwithstanding the foregoing, the Company shall have no obligation to cause Representative's Option to be transferred on its books to any person if, in the opinion of counsel to the Company, such transfer does not comply with the provisions of the Securities Act of 1933, as amended (the "Act"), or applicable state blue sky laws and the rules and regulations thereunder. 5. The Company shall at all times reserve and keep available out of its authorized and unissued Common Stock, solely for the purpose of providing for the exercise of this Representative's Option, such number of shares of Common Stock as shall, from time to time, be sufficient therefor. The Company covenants that all Option Shares issuable upon exercise of this Representative's Option shall be validly issued, fully paid, nonassessable, and free of preemptive rights. 6. (a) If the Company shall at any time subdivide its outstanding Common Stock by recapitalization, reclassification or split-up thereof, the number of Option Shares subject to this Representative's Option immediately prior to such subdivision shall be proportionately increased, and if the Company shall at any time combine the outstanding Common Stock by recapitalization, reclassification or combination thereof, the number of Option Shares subject to this Representative's Option immediately prior to such combination shall be proportionately decreased. Any corresponding adjustment to the Exercise Price shall become effective at the close of business on the record date for such subdivision or combination. 4 (b) If the Company after the date hereof shall distribute to the holders of its Common Stock any securities or other assets (other than a distribution of Common Stock or a cash distribution made as a dividend payable out of earnings or out of any earned surplus legally available for dividends under the laws of the jurisdiction of incorporation of the Company), the Board of Directors shall be required to make such equitable adjustment in the Exercise Price in effect immediately prior to the record date of such distribution as may be necessary to preserve the rights substantially proportionate to those enjoyed hereunder by the Holder immediately prior to such distribution. Any such adjustment made in good faith by the Board of Directors shall be final and binding upon the Holder and shall become effective as of the record date for such distribution. (c) No adjustment in the number of Option Shares subject to this Representative's Option shall be required unless such adjustment would require an increase or decrease in such number of Option Shares of at least 1% of the then adjusted number of Option Shares issuable upon exercise of this Representative's Option, provided, however, that any adjustments which by reason of the foregoing are not required at the time to be made shall be carried forward and taken into account and included in determining the amount of any subsequent adjustment; and provided further, however, that in case the Company shall at any time subdivide or combine the outstanding Common Stock or issue any additional Common Stock as a dividend, said percentage shall forthwith be proportionately increased in the case of a combination or decreased in the case of a subdivision or dividend of Common Stock so as to appropriately reflect the same. If the Company shall make a record of the holders of its Common Stock for the purpose of entitling them to receive any dividend or distribution and legally abandon its plan to pay or deliver such dividend or distribution then no adjustment in the number of Option Shares subject to this Representative's Option shall be required by reason of the making of such record. (d) Whenever the number of Option Shares purchasable upon the exercise of this Representative's Option is adjusted as provided herein, the Exercise Price shall be adjusted (to the nearest one tenth of a cent) by respectively multiplying such Exercise Price immediately prior to such adjustment by a fraction, the numerator of which shall be the number of Option Shares purchasable upon the exercise of this Representative's 5 Option immediately prior to such adjustment, and the denominator of which shall be the number of Option Shares purchasable immediately thereafter. (e) In case of any reclassification of the outstanding Common Stock (other than a change covered by (a) hereof or which solely affects the par value of such Common Stock) or in the case of any merger or consolidation of the Company with or into another corporation (other than a consolidation or merger in which the Company is the continuing corporation and which does not result in any reclassification or capital reorganization of the outstanding Common Stock), or in the case of any sale or conveyance to another corporation of the property of the Company as an entirety or substantially as an entirety in connection with which the Company is dissolved, the Holder of this Representative's Option shall have the right thereafter (until the expiration of the right of exercise of this Representative's Option) to receive upon the exercise hereof, for the same aggregate Exercise Price payable hereunder immediately prior to such event, the kind and amount of shares of stock or other securities or property receivable upon such reclassification, capital reorganization, merger or consolidation, or upon the dissolution following any sale or other transfer, by a holder of the number of Option Shares obtainable upon the exercise of this Representative's Option immediately prior to such event; and if any reclassification also results in a change in Common Stock covered by (a) above, then such adjustment shall be made pursuant to both this paragraph (e) and paragraph (a). The provisions of this paragraph (e) shall similarly apply to successive re-classifications, or capital reorganizations, mergers or consolidations, sales or other transfers. If the Company after the date hereof shall issue or agree to issue Common Stock, Options or Convertible Securities, other than as described herein, and such issuance or agreement would in the opinion of the Board of Directors of the Company materially affect the rights of the Holders of the Representative's Option, the Exercise Price and the number of Option Shares purchasable upon exercise of the Representative's Option shall be adjusted in such matter, if any, and at such time as the Board of Directors of the Company, in good faith, may determine to be equitable in the circumstances. The minutes or unanimous consent approving such action shall set forth the Board of Director's determination as to whether an adjustment is warranted and the manner of such adjustment. In the absence of such determination, any Holder may request in 6 writing that the Board of Directors make such determination. Any such determination made in good faith by the Board of Directors shall be final and binding upon the Holders. If the Board fails, however, to make such determination within sixty (60) days after such request, such failure shall be deemed a determination that an adjustment is required. (i) Upon occurrence of each event requiring an adjustment of the Exercise Price and of the number of Option Shares purchasable upon exercise of this Representative's Option in accordance with, and as required by, the terms hereof, the Company shall forthwith employ a firm of certified public accountants (who may be the regular accountants for the Company) who shall compute the adjusted Exercise Price and the adjusted number of Option Shares purchasable at such adjusted Exercise Price by reason of such event in accordance herewith. The Company shall give to each Holder of the Representative's Option a copy of such computation which shall be conclusive and shall be binding upon such Holders unless contested by Holders by written notice to the Company within thirty (30) days after receipt thereof. (ii) In case the Company after the date hereof shall propose (A) to pay any dividend payable in stock to the holders of its Common Stock or to make any other distribution (other than cash dividends) to the holders of its Common Stock or to grant rights to subscribe to or purchase any additional shares of any class or any other rights or options, (B) to effect any reclassification involving merely the subdivision or combination of outstanding Common Stock, or (C) any capital reorganization or any consolidation or merger, or any sale, transfer or other disposition of its property, assets and business substantially as an entirety, or the liquidation, dissolution or winding up of the Company, then in each such case, the Company shall obtain the computation described above and if an adjustment to the Exercise Price is required, the Company shall notify the Holders of the Representative's Option of such proposed action, which shall specify the record date for any such action or if no record date is established with respect thereto, the date on which such action shall occur or commence, or the date of participation therein by the holders of Common Stock if any such date is to be fixed, and shall also set forth such facts with respect thereto as shall be reasonably necessary to indicate the effect of such action on the Exercise Price and the number, or kind, or class 7 of shares or other securities or property obtainable upon exercise of this Representative's Option after giving effect to any adjustment which will be required as a result of such action. Such notice shall be given at least twenty (20) days prior to the record date for determining holders of the Common Stock for purposes of any such action, and in the case of any action for which a record date is not established then such notice shall be mailed at least twenty (20) days prior to the taking of such proposed action. (iii) Failure to file any certificate or notice or to give any notice, or any defect in any certificate or notice, shall not effect the legality or validity of the adjustment in the Exercise Price or in the number, or kind, or class of shares or other securities or property obtainable upon exercise of the Representative's Option or of any transaction giving rise thereto. (f) The Company shall not be required to issue fractional Option Shares upon any exercise of the Representative's Option. As to any final fraction of a Share which the Holder of a Representative's Option would otherwise be entitled to purchase upon such exercise, the Company shall pay a cash adjustment in respect of such final fraction in an amount equal to the same fraction of the current market price of a share of such stock on the business day preceding the day of exercise. The Holder of a Representative's Option, by his acceptance of a Representative's Option, expressly waives any right to receive any fractional Option Shares. (g) Regardless of any adjustments pursuant to this section in the Exercise Price or in the number, or kind, or class of shares or other securities or other property obtainable upon exercise of a Representative's Option, a Representative's Option may continue to express the Exercise Price and the number of Option Shares obtainable upon exercise at the same price and number of Option Shares as are stated herein. (h) The number of Option Shares, the Exercise Price and all other terms and provisions of the Company's agreement with the Holder of this Representative's Option shall be determined exclusively pursuant to the provisions hereof. (i) The above provisions of this section 6 shall similarly apply to successive transactions which require adjustments. 8 (j) Notwithstanding any other language to the contrary herein, (i) the anti-dilution terms of this Representative's Option will not be enforced so as to provide the Holder the right to receive, or for the accrual of, cash dividends prior to the exercise of this Representative's Option, and (ii) the anti-dilution terms of this Representative's Option will not be enforced in such a manner as to provide the Holder with disproportionate rights, privileges and economic benefits not provided to purchasers of the Common Stock in the Public Offering. 7. The issuance of any Option Shares or other securities upon the exercise of this Representative's Option and the delivery of certificates or other instruments representing such securities, or other securities, shall be made without charge to the Holder for any tax or other charge in respect of such issuance. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of any certificate in a name other than that of the Holder and the Company shall not be required to issue or deliver any such certificate unless and until the person or persons requesting the issue thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. 8. (a) If, at any time after _____________, 2003 (one year after the Effective Date of the Registration Statement), and ending ____________, 2008 (six years after the Effective Date of the Registration Statement), the Company shall file a registration statement (other than on Form S-4, Form S-8, or any successor form) with the Securities and Exchange Commission (the "Commission") while Option Shares are available for purchase upon exercise of this Representative's Option or while any Option Shares (collectively, the "Representative's Option and the underlying Option Shares, the "Representative's Securities") are outstanding, the Company shall, on one occasion only, give the Holder and all the then holders of such Representative's Securities at least 30 days prior written notice of the filing of such registration statement. If requested by the Holder or by any such holder in writing within 20 days after receipt of any such notice, the Company shall, at the Company's sole expense (other than the fees and disbursements of counsel for the Holder or such holder and the underwriting discounts and non-accountable expenses, if any, payable in respect of the securities sold by the Holder 9 or any such holder), register or qualify the Option Shares of the Holder or any such holders who shall have made such request concurrently with the registration of such other securities, all to the extent requisite to permit the public offering and sale of the Option Shares requested to be registered, and will use its best efforts through its officers, directors, auditors and counsel to cause such registration statement to become effective as promptly as practicable. Notwithstanding the foregoing, if the managing underwriter of any such offering shall advise the Company in writing that, in its opinion, the distribution of all or a portion of the Option Shares requested to be included in the registration concurrently with the securities being registered by the Company would materially adversely affect the distribution of such securities by the Company for its own account, then the Holder or any such holder who shall have requested registration of his or its Option Shares shall delay the offering and sale of such Option Shares (or the portions thereof so designated by such managing underwriter) for such period, not to exceed 90 days, as the managing underwriter shall request, provided that no such delay shall be required as to any Option Shares if any securities of the Company are included in such registration statement for the account of any person other than the Company and the Holder unless the securities included in such registration statement for such other person shall have been reduced pro rata to the reduction of the Option Shares which were requested to be included in such registration. (b) If at any time after __________, 2003 (one year after the Effective Date of the Registration Statement), and before ___________, 2007 (five years after the Effective Date of the Registration Statement), the Company shall receive a written request from holders of Representative's Securities who, in the aggregate, own (or upon exercise of all Option Shares will own) a majority of the total number of Option Shares, the Company shall, as promptly as practicable, prepare and file with the Commission a registration statement sufficient to permit the public offering and sale of the Option Shares, and will use its best efforts through its officers, directors, auditors and counsel to cause such registration statement to become effective as promptly as practicable; provided, however, that the Company shall only be obligated to file and obtain effectiveness of one such registration statement for which all expenses incurred in connection with such registration (other than the fees and disbursements of counsel for the Holder or such 10 holders and underwriting discounts and nonaccountable expenses, if any, payable in respect of the Option Shares sold by the Holder or any such holder) shall be borne by the Company. (c) In the event of a registration pursuant to the provisions of this paragraph 8, the Company shall use its best efforts to cause the Option Shares so requested to be registered or qualified for sale under the securities or blue sky laws of such jurisdictions as the Holder or such holders may reasonably request; provided, however, that the Company shall not be required to qualify to do business in any state by reason of this paragraph 8(c) in which it is not otherwise required to qualify to do business and provided further, that the Company has no obligation to qualify the Option Shares where such qualification would cause any unreasonable delay or expenditure by the Company. (d) The Company shall keep effective any registration or qualification contemplated by this paragraph 8 and shall from time to time amend or supplement each applicable registration statement, preliminary prospectus, final prospectus, application, document and communication for such period of time as shall be required to permit the Holder or such holders to complete the offer and sale of the Option Shares covered thereby. The Company shall in no event be required to keep any such registration or qualification in effect for a period in excess of nine months from the date on which the Holder and such holders are first free to sell such Option Shares; provided, however, that if the Company is required to keep any such registration or qualification in effect with respect to securities other than the Option Shares beyond such period, the Company shall keep such registration or qualification in effect as it relates to the Option Shares for so long as such registration or qualification remains or is required to remain in effect in respect of such other securities. (e) In the event of a registration pursuant to the provisions of this paragraph 8, the Company shall furnish to the Holder and to each such holder such reasonable number of copies of the registration statement and of each amendment and supplement thereto (in each case, including all exhibits), such reasonable number of copies of each prospectus contained in such registration statement and each supplement or amendment thereto 11 (including each preliminary prospectus), all of which shall conform to the requirements of the Act and the rules and regulations thereunder, and such other documents as the Holder or such holders may reasonably request in order to facilitate the disposition of the Option Shares included in such registration. (f) In the event of a registration pursuant to the provisions of this paragraph 8, the Company shall furnish the Holder and each holder of any Option Shares so registered with an opinion of its counsel to the effect that (i) the registration statement has become effective under the Act and no order suspending the effectiveness of the registration statement, preventing or suspending the use of the registration statement, any preliminary prospectus, any final prospectus, or any amendment or supplement thereto has been issued, nor to such counsel's actual knowledge has the Securities and Exchange Commission or any securities or blue sky authority of any jurisdiction instituted or threatened to institute any proceedings with respect to such an order and (ii) the registration statement and each prospectus forming a part thereof (including each preliminary prospectus), and any amendment or supplement thereto, complies as to form with the Act and the rules and regulations thereunder. Such counsel shall also provide a Blue Sky Memorandum setting forth the jurisdictions in which the Option Shares have been registered or qualified for sale pursuant to the provisions of paragraph 8(c). (g) The Company agrees that until all the Option Shares have been sold under a registration statement or pursuant to Rule 144 under the Act, or until the Option Shares may be sold under Rule 144 (k), it shall keep current in filing all reports, statements and other materials required to be filed with the Commission to permit holders of the Option Shares to sell such securities under Rule 144. (h) The Holder and any holders who propose to register their Option Shares under the Act, shall execute and deliver to the Company a selling stockholder questionnaire on a form to be provided by the Company. (i) The Company shall not be required by the terms hereof to file a Registration Statement if, in the opinion of counsel to the holders of the Option Shares and counsel for the Company (or, should they not agree, in the opinion of another counsel 12 experienced in securities law matters acceptable to counsel for the holders of Option Shares and the Company), the proposed public offering or other transfer as to which such Registration Statement is requested to be filed is exempt from applicable federal and state securities laws, rules, regulations and would result in unaffiliated purchasers or transferees obtaining securities that are not "restricted securities" as that term is defined in Rule 144 under the Act. 9. (a) Subject to the conditions set forth below, the Company agrees to indemnify and hold harmless the Holder, any holder of any of the Representative's Securities, their officers, directors, partners, employees, agents and counsel, and each person, if any, who controls any such person within the meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), from and against any and all loss, liability, charge, claim, damage and expense whatsoever (which shall include, for all purposes of this Section 9, but not be limited to, attorneys' fees and any and all expense whatsoever incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever, and any and all amounts paid in settlement of any claim or litigation), as and when incurred, arising out of, based upon, or in connection with (i) any untrue statement or alleged untrue statement of a material fact contained (A) in any registration statement, preliminary prospectus or final prospectus (as from time to time amended and supplemented), or any amendment or supplement thereto, or (B) in any application or other document or communication (in this Section 9 collectively called an "application") executed by or on behalf of the Company or based upon written information furnished by or on behalf of the Company filed in any jurisdiction in order to register or qualify any of the Option Shares under the securities or blue sky laws thereof or filed with the Commission or any securities exchange; or any omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, unless such statement or omission was made in reliance upon and in conformity with written information furnished to the Company with respect to the Holder or any holder of any of the Representative's Securities by or on behalf of such person expressly for inclusion in any registration statement, preliminary prospectus, or final prospectus, or any amendment or supplement thereto, or in any application, as the case 13 may be, or (ii) any breach of any representation, warranty, covenant or agreement of the Company contained in this Representative's Option. The foregoing agreement to indemnify shall be in addition to any liability the Company may otherwise have, including liabilities arising under this Representative's Option. If any action is brought against the Holder or any holder of any of the Representative's Securities or any of its officers, directors, partners, employees, agents or counsel, or any controlling persons of such person (an "indemnified party") in respect of which indemnity may be sought against the Company pursuant to the foregoing paragraph, such indemnified party or parties shall promptly notify the Company in writing of the institution of such action (but the failure so to notify shall not relieve the Company from any liability it may otherwise have to Holder or any holder of any of the Representative's Securities) and the Company shall promptly assume the defense of such action, including the employment of counsel (reasonably satisfactory to such indemnified party or parties) and payment of expenses. Such indemnified party or parties shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such indemnified party or parties unless the employment of such counsel shall have been authorized in writing by the Company in connection with the defense of such action or the Company shall not have promptly employed counsel reasonably satisfactory to such indemnified party or parties to have charge of the defense of such action or such indemnified party or parties shall have reasonably concluded that there may be one or more legal defenses available to it or them or to other indemnified parties which are different from or additional to those available to the Company, in any of which events such fees and expenses shall be borne by the Company and the Company shall not have the right to direct the defense of such action on behalf of the indemnified party or parties. Anything in this paragraph to the contrary notwithstanding, the Company shall not be liable for any settlement of any such claim or action effected without its written consent. (b) The Holder and each holder agrees to indemnify and hold harmless the Company, each director of the Company, each officer of the Company who shall have signed any registration statement covering the Option Shares held by the Holder and each holder and each other person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, to the same extent as the 14 foregoing indemnity from the Company to the Holder and each holder in paragraph 9(a), but only with respect to statements or omissions, if any, made in any registration statement, preliminary prospectus, or final prospectus (as from time to time amended and supplemented), or any amendment or supplement thereto, or in any application, in reliance upon and in conformity with written information furnished to the Company with respect to the Holder and each holder by or on behalf of the Holder and each holder expressly for inclusion in any such registration statement, preliminary prospectus, or final prospectus, or any amendment or supplement thereto, or in any application, as the case may be. If any action shall be brought against the Company or any other person so indemnified based on any such registration statement, preliminary prospectus, or final prospectus, or any amendment or supplement thereto, or in any application, and in respect of which indemnity may be sought against the Holder and each holder pursuant to this paragraph 9(b), the Holder and each holder shall have the rights and duties given to the Company, and the Company and each other person so indemnified shall have the rights and duties given to the indemnified parties, by the provisions of paragraph 9(a). (c) To provide for just and equitable contribution, if (i) an indemnified party makes a claim for indemnification pursuant to paragraph 9(a) or 9(b) (subject to the limitations thereof) but it is found in a final judicial determination, not subject to further appeal, that such indemnification may not be enforced in such case, even though this Agreement expressly provides for indemnification in such case, or (ii) any indemnified or indemnifying party seeks contribution under the Act, the Exchange Act or otherwise because the indemnification provided for in this Section 9 is for any reason held to be unenforceable by the Company and the Holder and any holder, then the Company (including for this purpose any contribution made by or on behalf of any director of the Company, any officer of the Company who signed any such registration statement and any controlling person of the Company), as one entity, and the Holder and any holder of any of the Option Shares included in such registration in the aggregate (including for this purpose any contribution by or on behalf of the Holder or any holder), as a second entity, shall contribute to the losses, liabilities, claims, damages and expenses whatsoever to which any of them may be subject, on the basis of relevant equitable considerations such as the relative fault of the Company and the Holder or any such holder in connection with 15 the facts which resulted in such losses, liabilities, claims, damages and expenses. The relative fault, in the case of an untrue statement, alleged untrue statement, omission or alleged omission, shall be determined by, among other things, whether such statement, alleged statement, omission or alleged omission relates to information supplied by the Company, by the Holder or by any holder of Option Shares included in such registration, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement, alleged statement, omission or alleged omission. The Company and the Holder agree that it would be unjust and inequitable if the respective obligations of the Company and the Holder for contribution were determined by pro rata or per capita allocation of the aggregate losses, liabilities, claims, damages and expenses (even if the Holder and the other indemnified parties were treated as one entity for such purpose) or by any other method of allocation that does not reflect the equitable considerations referred to in this paragraph 9(c). No person guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. For purposes of this paragraph 9(c), each person, if any, who controls the Holder or any holder of any of the Representative's Securities within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act and each officer, director, partner, employee, agent and counsel of each such person, shall have the same rights to contribution as such person and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, each officer of the Company who shall have signed any such registration statement, and each director of the Company shall have the same rights to contribution as the Company, subject in each case to the provisions of this paragraph 9(c). Anything in this paragraph 9(c) to the contrary notwithstanding, no party shall be liable for contribution with respect to the settlement of any claim or action effected without its written consent. This paragraph 9(c) is intended to supersede any right to contribution under the Act, the Exchange Act or otherwise. 10. Unless the Option Shares have been registered or an exemption from such registration is available, the Option Shares issued upon exercise of this Representative's Option shall be subject to a stop transfer order and the certificate or certificates evidencing any such Option Shares shall bear the following legend or a legend substantially similar thereto: 16 THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, NOR HAVE THEY BEEN REGISTERED UNDER THE SECURITIES ("BLUE SKY") LAWS OF ANY STATE. THESE SECURITIES MAY NOT BE SOLD, TRANSFERRED, PLEDGED, OR HYPOTHECATED UNLESS THEY HAVE FIRST BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND UNDER THE APPLICABLE STATE SECURITIES ("BLUE SKY") LAWS OR UNLESS THE AVAILABILITY OF AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND LAWS IS ESTABLISHED TO THE SATISFACTION OF THE COMPANY, WHICH MAY NECESSITATE A WRITTEN OPINION OF SELLER'S COUNSEL SATISFACTORY TO COMPANY COUNSEL. 11. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of any Representative's Option (and upon surrender of any Representative's Option if mutilated), and upon reimbursement of the Company's reasonable incidental expenses, the Company shall execute and deliver to the Holder thereof a new Representative's Option of like date, tenor and denomination. 12. The Holder of any Representative's Option shall not have, solely on account of such status, any rights of a stockholder of the Company, either at law or in equity, or to any notice of meetings of stockholders or of any other proceedings of the Company, except as provided in this Representative's Option. 13. This Representative's Option shall be construed in accordance with the laws of the State of Colorado, without giving effect to conflict of laws. Dated: , 2002 ---------------------------- NATURAL GAS SERVICES GROUP, INC. By: ------------------------------------ Wayne L. Vinson, President [SEAL] 17 FORM OF ASSIGNMENT (To be executed by the registered holder if such holder desires to transfer the attached Representative's Option.) FOR VALUE RECEIVED, ___________________________________ hereby sells, assigns and transfers unto ________________________ Representative's Option to purchase __________ shares of Common Stock of Natural Gas Services Group, Inc. (the "Company"), together with all right, title and interest therein, and does hereby irrevocably constitute and appoint ____________________________ attorney to transfer such Representative's Option on the books of the Company, with full power of substitution. Dated: -------------------- Signature: --------------------------------------------------- Signature Guaranteed: NOTICE The signature on the foregoing Assignment must correspond to the name as written upon the face of this Representative's Option in every particular, without alteration or enlargement or any change whatsoever. Signature(s) must be guaranteed by an eligible guarantor institution which is a participant in a Securities Transfer Association recognized program. ELECTION TO EXERCISE (To be executed by the holder if such holder desires to exercise the attached Representative's Option) The undersigned hereby exercises his or its rights to subscribe for __________ shares of Common Stock covered by the within Representative's Option (each as defined in the within Representative's Option) and tenders payment herewith in the amount of $__________ in accordance with the terms thereof, and requests that certificates for such Common Stock be issued in the name of, and delivered to: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Print Name, Address and Social Security or Tax Identification Number) and, if such number of shares of Common Stock (or portions thereof) shall not be all the Common Stock covered by the within Representative's Option, that a new Representative's Option for the balance of the Representative's Option covered by the within Representative's Option be registered in the name of, and delivered to, the undersigned at the address stated below. Name: --------------------------------------------------------------------------- (Print) Address: ------------------------------------------------------------------------ - ------------------------------------------ (Signature) NOTICE The signature on the foregoing Assignment must correspond to the name as written upon the face of this Representative's Option in every particular, without alteration or enlargement or any change whatsoever. Signature(s) must be guaranteed by an eligible guarantor institution which is a participant in a Securities Transfer Association recognized program. EX-4.5 6 d96705a1exv4w5.txt FORM OF OPTION FOR PURCHASE OF WARRANTS EXHIBIT 4.5 THE REPRESENTATIVE'S OPTION REPRESENTED BY THIS CERTIFICATE AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF (THE "SECURITIES") HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, PURSUANT TO A REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AND WITH THE SECURITIES ADMINISTRATORS OF CERTAIN STATES UNDER THE SECURITIES ("BLUE SKY") LAWS OF SUCH STATES. HOWEVER, NEITHER THE REPRESENTATIVE'S OPTION NOR SUCH SECURITIES MAY BE SOLD, TRANSFERRED, PLEDGED, OR HYPOTHECATED EXCEPT PURSUANT TO (i) A POST-EFFECTIVE AMENDMENT TO SUCH REGISTRATION STATEMENT, (ii) A SEPARATE REGISTRATION STATEMENT UNDER SUCH ACT, OR (iii) AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND UNDER THE APPLICABLE BLUE SKY LAWS. THIS REPRESENTATIVE'S OPTION MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED EXCEPT AS OTHERWISE PROVIDED HEREIN AND THE HOLDER OF THIS REPRESENTATIVE'S OPTION, BY ITS ACCEPTANCE HEREOF, AGREES THAT IT WILL NOT SELL, TRANSFER OR ASSIGN THIS REPRESENTATIVE'S OPTION EXCEPT AS OTHERWISE PROVIDED HEREIN. NATURAL GAS SERVICES GROUP, INC. REPRESENTATIVE'S OPTION FOR THE PURCHASE OF WARRANTS NO. UWW-001 165,000 REPRESENTATIVE'S OPTIONS THIS CERTIFIES that, for receipt in hand of $50 and other value received (the "Purchase Price"), NEIDIGER, TUCKER, BRUNER, INC. (the "Holder"), is entitled to subscribe for and purchase from NATURAL GAS SERVICES GROUP, INC., a Colorado corporation (the "Company"), upon the terms and conditions set forth herein, at any time, or from time to time, after _______________, 2003 (12 months from the Effective Date, as defined below) and before 5:00 p.m. Colorado time on _______________, 2007 (the "Exercise Period"), 165,000 Warrants (a "Warrant" or the "Warrants") of the Company at an exercise price of $______ per Representative's Option or 125% of the offering price of Warrants sold by the Company in the Public Offering (hereinafter defined). Subject to the higher exercise price and the longer exercise period set forth below each Warrant shall be identical to the Warrants sold in the public offering to be underwritten by the Holder (the "Public Offering"). Each Warrant shall be exercisable to purchase one share of Common Stock (a "Warrant Share") at a price of $__________ (125% of the exercise price of the Warrants sold in the Public Offering; the "Exercise Price") until _______________, 2008, which is six years from the date on which the Company's Registration Statement on Form SB-2, Registration No. 333-88314 (the 1 "Registration Statement") was declared effective by the Securities and Exchange Commission (the "Effective Date"). The term the "Holder" as used herein shall include any transferee to whom this Representative's Option has been transferred in accordance with the terms of this Representative's Option. As used herein the term "this Representative's Option" shall mean and include this Representative's Option and any Representative's Option or Representative's Options hereafter issued as a consequence of the exercise or transfer of this Representative's Option in whole or in part, but shall exclude the Warrants, and the term "Common Stock" shall mean and include the Company's Common Stock with ordinary voting power, which class at the date hereof is publicly traded. 1. This Representative's Option may not be sold, transferred, assigned, pledged or hypothecated until ______________, 2003 (12 months from the Effective Date of the Registration Statement) except that it may be transferred, in whole or in part, (i) to one or more officers or partners of the Holder (or the officers or partners of any such partner); (ii) to a member of the underwriting syndicate and/or its officers or partners; or (iii) by operation of law. After _________, 2003, this Representative's Option may be sold, transferred, assigned or hypothecated in accordance with applicable law. 2. (a) This Representative's Option may be exercised during the Exercise Period as to the whole or any lesser number of Warrants, by the surrender of this Representative's Option (with the election attached hereto duly executed) to the Company at its office at 2911 South County Road 1260, Midland, Texas 79706, or such other place as is designated in writing by the Company, together with a certified or bank cashier's check payable to the order of the Company in an amount equal to the Purchase Price. (b) Following exercise of this Representative's Option, and at anytime thereafter through and until expiration of the Warrants, the Holder may exercise the Warrants underlying this Representative's Option by tendering a notice of exercise, together with a certified or bank cashier's check payable to the order of the Company, in 2 an amount equal to the Exercise Price multiplied by the number of Warrant Shares as to which such exercise relates. (c) Upon written request of the Holder, and in lieu of payment of the Exercise Price of the Warrants by check in accordance with paragraph 2(b) hereof, the Holder may exercise the Warrants (or any portion thereof) for and receive the number of Warrants equal to a fraction, the numerator of which equals (i) the amount by which the Current Market Price of the Common Stock for the ten (10) trading days preceding the date of exercise exceeds the Exercise Price per Warrant, multiplied by (ii) the number of Warrant Shares to be purchased; the denominator of which equals the Current Market Price. (d) For the purposes of any computation under this Representative's Option, the "Current Market Price" at any date shall be the closing price of the Common Stock on the business day next preceding the event requiring an adjustment hereunder. If the principal trading market for such securities is an exchange, the closing price shall be the reported last sale price on such exchange on such day provided if trading of such Common Stock is listed on any consolidated tape, the closing price shall be the reported last sale price set forth on such consolidated tape. If the principal trading market for such securities is the over-the-counter market, the closing price shall be the last reported sale price on such date as set forth by The Nasdaq Stock Market, Inc., or, if the security is not quoted on such market, the average closing bid and asked prices as set forth in the National Quotation Bureau pink sheet or the Electronic Bulletin Board System for such day. Notwithstanding the foregoing, if there is no reported last sale price or average closing bid and asked prices, as the case may be, on a date prior to the event requiring an adjustment hereunder, then the Current Market Price shall be determined as of the latest date prior to such day for which such last sale price or average closing bid and asked price is available. 3. Upon each exercise of this Representative's Option, the Holder shall be deemed to be the holder of record of the Warrants issuable upon such exercise, notwithstanding that the transfer books of the Company shall then be closed or certificates representing such Warrants shall not then have been actually delivered to the Holder. As soon as practicable after each such 3 exercise of this Representative's Option, the Company shall issue and deliver to the Holder a certificate or certificates for the Warrants issuable upon such exercise, registered in the name of the Holder or its designee. If this Representative's Option should be exercised in part only, the Company shall, upon surrender of this Representative's Option for cancellation, execute and deliver a new Representative's Option evidencing the right of the Holder to purchase the balance of the Warrants (or portions thereof) subject to purchase hereunder. 4. Any warrants, other than the Warrants, issued upon the transfer or exercise in part of this Representative's Option (together with this Representative's Option, the "Representative's Options") shall be numbered and shall be registered in a Representative's Option Register as they are issued. The Company shall be entitled to treat the registered holder of any Representative's Option on the Representative's Option Register as the owner in fact thereof for all purposes and shall not be bound to recognize any equitable or other claim to or interest in such Representative's Option on the part of any other person. The Representative's Options shall be transferable only on the books of the Company upon delivery thereof duly endorsed by the Holder or by his duly authorized attorney or representative, or accompanied by proper evidence of succession, assignment or authority to transfer. In all cases of transfer by an attorney, executor, administrator, guardian or other legal representative, duly authenticated evidence of his or its authority shall be produced. Upon any registration of transfer, the Company shall deliver a new Representative's Option or Representative's Options to the person entitled thereto. The Representative's Options may be exchanged, at the option of the Holder thereof, for another Representative's Option, or other Representative's Options of different denominations, of like tenor and representing in the aggregate the right to purchase a like number of Warrants (or portions thereof) upon surrender to the Company or its duly authorized agent. Notwithstanding the foregoing, the Company shall have no obligation to cause Representative's Options to be transferred on its books to any person if, in the opinion of counsel to the Company, such transfer does not comply with the provisions of the Securities Act of 1933, as amended (the "Act"), or applicable state blue sky laws and the rules and regulations thereunder. 5. The Company shall at all times reserve and keep available out of its authorized and unissued Common Stock, solely for the purpose of providing for the exercise of this Representative's Option and the Warrants purchasable upon exercise of this Representative's 4 Option, such number of shares of Common Stock as shall, from time to time, be sufficient therefor. The Company covenants that all shares of Common Stock issuable upon exercise of Warrants underlying this Representative's Option shall be validly issued, fully paid, nonassessable, and free of preemptive rights. 6. The rights and privileges of the Warrants issuable on exercise of this Representative's Option shall be as provided in the warrant certificate (the "Warrant Certificate") to be delivered to the Holder on exercise of this Representative's Option. All anti-dilution and other rights shall be as provided for in the Warrant Certificate and as set forth in the warrant agreement by and between the Company and the Warrant Agent for the Company (the "Warrant Agreement"). The provisions of the Warrant Agreement relating to anti-dilution rights and any other rights and privileges granted to holders of publicly traded Warrants are incorporated by reference herein as if more fully set forth herein. Notwithstanding any other language to the contrary herein or in the Warrant Agreement by and between the Company and the Warrant Agent, in the event, prior to the exercise of this Warrant, Holders of publicly-traded Warrants shall be entitled to the benefit of any anti-dilution provisions of the Warrant Agreement or the Warrant Certificate then, in such event, the Warrants issuable upon exercise of this Representative's Option shall be adjusted in accordance with the provisions of the anti-dilution provisions of the Warrant Certificate and the Warrant Agreement in a manner identical to the adjustments made pursuant to the anti-dilution provisions and other rights and privileges applicable to publicly-traded warrants. Any such adjustment may be made at or immediately following the date of exercise hereof. Notwithstanding any other language to the contrary herein, (i) the anti-dilution terms of this Representative's Option will not be enforced so as to provide the Holder the right to receive, or for the accrual of, cash dividends prior to the exercise of this Representative's Option, and (ii) the anti-dilution terms of this Representative's Option will not be enforced in such a manner as to provide the Holder with disproportionate rights, privileges and economic benefits not provided to purchasers of Warrants in the Public Offering. 7. The issuance of any Warrants or other securities upon the exercise of this Representative's Option or any Warrant Shares upon the exercise of the Warrants, and the delivery of certificates or other instruments representing such securities, or other securities, shall be made without charge to the Holder for any tax or other charge in respect of such issuance. 5 The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of any certificate in a name other than that of the Holder and the Company shall not be required to issue or deliver any such certificate unless and until the person or persons requesting the issue thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. 8. (a) If, at any time after ______________, 2003 (one year after the Effective Date of the Registration Statement), and ending _______________, 2008 (six years after the Effective Date of the Registration Statement), the Company shall file a registration statement (other than on Form S-4, Form S-8, or any successor form) with the Securities and Exchange Commission (the "Commission") while Warrants are available for purchase upon exercise of this Representative's Option or while any Warrants or Warrant Shares (collectively, the "Representative's Securities") are outstanding, the Company shall give the Holder and all the then holders of such Representative's Options and Representative's Securities at least 30 days prior written notice of the filing of such registration statement. If requested by the Holder or by any such holder in writing within 20 days after receipt of any such notice, the Company shall, at the Company's sole expense (other than the fees and disbursements of counsel for the Holder or such holder and the underwriting discounts and unaccountable expenses, if any, payable in respect of the securities sold by the Holder or any such holder), register or qualify the Representative's Securities of the Holder or any such holders who shall have made such request concurrently with the registration of such other securities, all to the extent requisite to permit the public offering and sale of the Representative's Securities, and will use its best efforts through its officers, directors, auditors and counsel to cause such registration statement to become effective as promptly as practicable. Notwithstanding the foregoing, if the managing underwriter of any such offering shall advise the Company in writing that, in its opinion, the distribution of all or a portion of the Representative's Securities requested to be included in the registration concurrently with the securities being registered by the Company would materially adversely affect the distribution of such securities by the Company for its own account, then the Holder or any such holder who shall have requested registration of his or its Representative's Securities shall delay 6 the offering and sale of such Representative's Securities (or the portions thereof so designated by such managing underwriter) for such period, not to exceed 90 days, as the managing underwriter shall request, provided that no such delay shall be required as to any Representative's Securities if any securities of the Company are included in such registration statement for the account of any person other than the Company and the Holder unless the securities included in such registration statement for such other person shall have been reduced pro rata to the reduction of the Representative's Securities which were requested to be included in such registration. (b) If at any time after _______________, 2003 (one year after the Effective Date of the Registration Statement), and before _______________, 2007 (five years after the Effective Date of the Registration Statement), the Company shall receive a written request from holders of Representative's Securities who, in the aggregate, own (or upon exercise of all Representative's Options will own) a majority of the total number of Representative's Securities, the Company shall, as promptly as practicable, prepare and file with the Commission a registration statement sufficient to permit the public offering and sale of the Representative's Securities, and will use its best efforts through its officers, directors, auditors and counsel to cause such registration statement to become effective as promptly as practicable; provided, however, that the Company shall only be obligated to file and obtain effectiveness of one such registration statement for which all expenses incurred in connection with such registration (other than the fees and disbursements of counsel for the Holder or such holders and underwriting discounts and unaccountable expenses, if any, payable in respect of the Representative's Securities sold by the Holder or any such holder) shall be borne by the Company. (c) In the event of a registration pursuant to the provisions of this paragraph 8, the Company shall use its best efforts to cause the Representative's Securities so registered to be registered or qualified for sale under the securities or blue sky laws of such jurisdictions as the Holder or such holders may reasonably request; provided, however, that the Company shall not be required to qualify to do business in any state by reason of this paragraph 8(c) in which it is not otherwise required to qualify to do business and provided further, that the Company has no obligation to qualify the 7 Representative's Securities where such qualification would cause any unreasonable delay or expenditure by the Company. (d) The Company shall keep effective any registration or qualification contemplated by this paragraph 8 and shall from time to time amend or supplement each applicable registration statement, preliminary prospectus, final prospectus, application, document and communication for such period of time as shall be required to permit the Holder or such holders to complete the offer and sale of the Representative's Securities covered thereby. The Company shall in no event be required to keep any such registration or qualification in effect for a period in excess of nine months from the date on which the Holder and such holders are first free to sell such Representative's Securities; provided, however, that if the Company is required to keep any such registration or qualification in effect with respect to securities other than the Representative's Securities beyond such period, the Company shall keep such registration or qualification in effect as it relates to the Representative's Securities for so long as such registration or qualification remains or is required to remain in effect in respect of such other securities. (e) In the event of a registration pursuant to the provisions of this paragraph 8, the Company shall furnish to the Holder and to each such holder such reasonable number of copies of the registration statement and of each amendment and supplement thereto (in each case, including all exhibits), such reasonable number of copies of each prospectus contained in such registration statement and each supplement or amendment thereto (including each preliminary prospectus), all of which shall conform to the requirements of the Act and the rules and regulations thereunder, and such other documents as the Holder or such holders may reasonably request in order to facilitate the disposition of the Representative's Securities included in such registration. (f) In the event of a registration pursuant to the provisions of this paragraph 8, the Company shall furnish the Holder and each holder of any Representative's Securities so registered with an opinion of its counsel to the effect that the registration statement has become effective under the Act and no order suspending the effectiveness of the 8 registration statement, preventing or suspending the use of the registration statement, any preliminary prospectus, any final prospectus, or any amendment or supplement thereto has been issued, nor to such counsel's actual knowledge has the Securities and Exchange Commission or any securities or blue sky authority of any jurisdiction instituted or threatened to institute any proceedings with respect to such an order and (ii) the registration statement and each prospectus forming a part thereof (including each preliminary prospectus), and any amendment or supplement thereto, complies as to form with the Act and the rules and regulations thereunder. Such counsel shall also provide a Blue Sky Memorandum setting forth the jurisdictions in which the Representative's Securities have been registered or qualified for sale pursuant to the provisions of paragraph 8(c). (g) The Company agrees that until all the Representative's Securities have been sold under a registration statement or pursuant to Rule 144 under the Act or until the Representative's Securities may be sold under Rule 144(k), it shall keep current in filing all reports, statements and other materials required to be filed with the Commission to permit holders of the Representative's Securities to sell such securities under Rule 144. (h) The Holder and any holders who propose to register their Representative's Securities under the Act shall execute and deliver to the Company a selling stockholder questionnaire on a form to be provided by the Company. (i) The Company shall not be required by the terms hereof to file a Registration Statement if, in the opinion of counsel to the holders of the Representative's Securities and counsel for the Company (or, should they not agree, in the opinion of another counsel experienced in securities law matters acceptable to counsel for the holders of Representative's Securities and the Company), the proposed public offering or other transfer as to which such Registration Statement is requested to be filed is exempt from applicable federal and state securities laws, rules, regulations and would result in unaffiliated purchasers or transferees obtaining securities that are not "restricted securities" as that term is defined in Rule 144 under the Act. 9 9. (a) Subject to the conditions set forth below, the Company agrees to indemnify and hold harmless the Holder, any holder of any of the Representative's Securities, their officers, directors, partners, employees, agents and counsel, and each person, if any, who controls any such person within the meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), from and against any and all loss, liability, charge, claim, damage and expense whatsoever (which shall include, for all purposes of this Section 9, but not be limited to, attorneys' fees and any and all expense whatsoever incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever, and any and all amounts paid in settlement of any claim or litigation), as and when incurred, arising out of, based upon, or in connection with (i) any untrue statement or alleged untrue statement of a material fact contained (A) in any registration statement, preliminary prospectus or final prospectus (as from time to time amended and supplemented), or any amendment or supplement thereto, or (B) in any application or other document or communication (in this Section 9 collectively called an "application") executed by or on behalf of the Company or based upon written information furnished by or on behalf of the Company filed in any jurisdiction in order to register or qualify any of the Representative's Securities under the securities or blue sky laws thereof or filed with the Commission or any securities exchange; or any omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, unless such statement or omission was made in reliance upon and in conformity with written information furnished to the Company with respect to the Holder or any holder of any of the Representative's Securities by or on behalf of such person expressly for inclusion in any registration statement, preliminary prospectus, or final prospectus, or any amendment or supplement thereto, or in any application, as the case may be, or (ii) any breach of any representation, warranty, covenant or agreement of the Company contained in this Representative's Option. The foregoing agreement to indemnify shall be in addition to any liability the Company may otherwise have, including liabilities arising under this Representative's Option. If any action is brought against the Holder or any holder of any of the Representative's Securities or any of its officers, directors, partners, employees, agents or 10 counsel, or any controlling persons of such person (an "indemnified party") in respect of which indemnity may be sought against the Company pursuant to the foregoing paragraph, such indemnified party or parties shall promptly notify the Company in writing of the institution of such action (but the failure so to notify shall not relieve the Company from any liability it may otherwise have to Holder or any holder of any of the Representative's Securities) and the Company shall promptly assume the defense of such action, including the employment of counsel (reasonably satisfactory to such indemnified party or parties) and payment of expenses. Such indemnified party or parties shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such indemnified party or parties unless the employment of such counsel shall have been authorized in writing by the Company in connection with the defense of such action or the Company shall not have promptly employed counsel reasonably satisfactory to such indemnified party or parties to have charge of the defense of such action or such indemnified party or parties shall have reasonably concluded that there may be one or more legal defenses available to it or them or to other indemnified parties which are different from or additional to those available to the Company, in any of which events such fees and expenses shall be borne by the Company and the Company shall not have the right to direct the defense of such action on behalf of the indemnified party or parties. Anything in this paragraph to the contrary notwithstanding, the Company shall not be liable for any settlement of any such claim or action effected without its written consent. (b) The Holder and each holder agrees to indemnify and hold harmless the Company, each director of the Company, each officer of the Company who shall have signed any registration statement covering the Representative's Securities held by the Holder and each holder and each other person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, to the same extent as the foregoing indemnity from the Company to the Holder and each holder in paragraph 9(a), but only with respect to statements or omissions, if any, made in any registration statement, preliminary prospectus, or final prospectus (as from time to time amended and supplemented), or any amendment or supplement thereto, or in any application, in reliance upon and in conformity with written information furnished to the 11 Company with respect to the Holder and each holder by or on behalf of the Holder and each holder expressly for inclusion in any such registration statement, preliminary prospectus, or final prospectus, or any amendment or supplement thereto, or in any application, as the case may be. If any action shall be brought against the Company or any other person so indemnified based on any such registration statement, preliminary prospectus, or final prospectus, or any amendment or supplement thereto, or in any application, and in respect of which indemnity may be sought against the Holder and each holder pursuant to this paragraph 9(b), the Holder and each holder shall have the rights and duties given to the Company, and the Company and each other person so indemnified shall have the rights and duties given to the indemnified parties, by the provisions of paragraph 9(a). (c) To provide for just and equitable contribution, if (i) an indemnified party makes a claim for indemnification pursuant to paragraph 9(a) or 9(b) (subject to the limitations thereof) but it is found in a final judicial determination, not subject to further appeal, that such indemnification may not be enforced in such case, even though this Agreement expressly provides for indemnification in such case, or (ii) any indemnified or indemnifying party seeks contribution under the Act, the Exchange Act or otherwise because the indemnification provided for in this Section 9 is for any reason held to be unenforceable by the Company and the Holder and any holder, then the Company (including for this purpose any contribution made by or on behalf of any director of the Company, any officer of the Company who signed any such registration statement and any controlling person of the Company), as one entity, and the Holder and any holder of any of the Representative's Securities included in such registration in the aggregate (including for this purpose any contribution by or on behalf of the Holder or any holder), as a second entity, shall contribute to the losses, liabilities, claims, damages and expenses whatsoever to which any of them may be subject, on the basis of relevant equitable considerations such as the relative fault of the Company and the Holder or any such holder in connection with the facts which resulted in such losses, liabilities, claims, damages and expenses. The relative fault, in the case of an untrue statement, alleged untrue statement, omission or alleged omission, shall be determined by, among other things, whether such statement, alleged statement, omission or alleged omission 12 relates to information supplied by the Company, by the Holder or by any holder of Representative's Securities included in such registration, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement, alleged statement, omission or alleged omission. The Company and the Holder agree that it would be unjust and inequitable if the respective obligations of the Company and the Holder for contribution were determined by pro rata or per capita allocation of the aggregate losses, liabilities, claims, damages and expenses (even if the Holder and the other indemnified parties were treated as one entity for such purpose) or by any other method of allocation that does not reflect the equitable considerations referred to in this paragraph 9(c). No person guilty of a fraudulent misrepresentation (within the meaning of Section 11 (f) of the Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. For purposes of this paragraph 9(c), each person, if any, who controls the Holder or any holder of any of the Representative's Securities within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act and each officer, director, partner, employee, agent and counsel of each such person, shall have the same rights to contribution as such person and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, each officer of the Company who shall have signed any such registration statement, and each director of the Company shall have the same rights to contribution as the Company, subject in each case to the provisions of this paragraph 9(c). Anything in this paragraph 9(c) to the contrary notwithstanding, no party shall be liable for contribution with respect to the settlement of any claim or action effected without its written consent. This paragraph 9(c) is intended to supersede any right to contribution under the Act, the Exchange Act or otherwise. 10. The securities issued upon exercise of the Representative's Options shall be subject to a stop transfer order and the certificate or certificates evidencing any such securities shall bear the following legend or a legend substantially similar thereto: THE SECURITIES REPRESENTED BY THIS CERTIFICATE AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF (THE "SECURITIES") HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, PURSUANT TO A REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AND WITH THE SECURITIES ADMINISTRATORS OF 13 CERTAIN STATES UNDER THE SECURITIES ("BLUE SKY") LAWS OF SUCH STATES. HOWEVER, NEITHER THE REPRESENTATIVE'S OPTIONS NOR SUCH SECURITIES MAY BE SOLD, TRANSFERRED, PLEDGED, OR HYPOTHECATED EXCEPT PURSUANT TO (i) A POST-EFFECTIVE AMENDMENT TO SUCH REGISTRATION STATEMENT, (ii) A SEPARATE REGISTRATION STATEMENT UNDER SUCH ACT, OR (iii) AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND UNDER THE APPLICABLE BLUE SKY LAWS. 11. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of any Representative's Option (and upon surrender of any Representative's Option if mutilated), and upon reimbursement of the Company's reasonable incidental expenses, the Company shall execute and deliver to the Holder thereof a new Representative's Option of like date, tenor and denomination. 12. The Holder of any Representative's Option shall not have, solely on account of such status, any rights of a stockholder of the Company, either at law or in equity, or to any notice of meetings of stockholders or of any other proceedings of the Company, except as provided in this Representative's Option. 13. This Representative's Option shall be construed in accordance with the laws of the State of Colorado, without giving effect to conflict of laws. Dated: , 2002 ------------------------- NATURAL GAS SERVICES GROUP, INC. By: ------------------------------------------- Wayne L. Vinson, President [SEAL] 14 FORM OF ASSIGNMENT (To be executed by the registered holder if such holder desires to transfer the attached Representative's Option.) FOR VALUE RECEIVED, _______________ hereby sells, assigns and transfers unto ________________________________ Representative's Option to purchase _____________ Warrants of Natural Gas Services Group, Inc. (the "Company"), together with all right, title and interest therein, and does hereby irrevocably constitute and appoint _______________________ attorney to transfer such Representative's Option on the books of the Company, with full power of substitution. Dated: ----------------------------------------------- Signature: ------------------------------------------- Signature Guaranteed: NOTICE The signature on the foregoing Assignment must correspond to the name as written upon the face of this Representative's Option in every particular, without alteration or enlargement or any change whatsoever. Signature(s) must be guaranteed by an eligible guarantor institution which is a participant in a Securities Transfer Association recognized program. 15 ELECTION TO EXERCISE (To be executed by the holder if such holder desires to exercise the attached Representative's Option) The undersigned hereby exercises his or its rights to subscribe for ______________ Warrants covered by the within Representative's Option (each as defined in the within Representative's Option) and tenders payment herewith in the amount of $______________ in accordance with the terms thereof, and requests that certificates for such Warrants be issued in the name of, and delivered to: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Print Name, Address and Social Security or Tax Identification Number) and, if such number of Warrants (or portions thereof) shall not be all the Warrants covered by the within Representative's Option, that a new Representative's Option for the balance of the Representative's Options (or portions thereof) covered by the within Representative's Option be registered in the name of, and delivered to, the undersigned at the address stated below. Name: --------------------------------------------------------------------------- (Print) Address: ------------------------------------------------------------------------ - -------------------------------- (Signature) Dated: Signature Guaranteed: -------------------------------- NOTICE The signature on the foregoing Assignment must correspond to the name as written upon the face of this Representative's Option in every particular, without alteration or enlargement or any change whatsoever. Signature(s) must be guaranteed by an eligible guarantor institution which is a participant in a Securities Transfer Association recognized program. EX-4.6 7 d96705a1exv4w6.txt FORM OF CONSULTING AGREEMENT EXHIBIT 4.6 CONSULTING SERVICES AGREEMENT This Consulting Agreement dated as of _______________, 2002 is entered into by and between Natural Gas Services Group, Inc. (the "Company") and Neidiger, Tucker, Bruner, Inc. (the "Consultant"). RECITALS WHEREAS, the Consultant has experience in the financial consulting business; and WHEREAS, the Consultant desires to provide the financial consulting services (the "Services") set forth in Section 3 hereof to the Company and the Company desires to retain the Consultant to provide the Services to the Company. NOW THEREFORE, in consideration of the promises and the mutual covenants and agreements hereinafter set forth, the parties hereto agree as follows: 1. Retention. The Company hereby retains the Consultant, and the Consultant agrees to be retained by the Company, to perform the Services as a Consultant to the Company on the terms and conditions set forth herein. The parties agree that the Consultant shall be retained by the Company as an independent contractor on a consulting basis and not as an employee of the Company. 2. Term. The term of this Agreement shall commence on the date hereof and shall end on _______________, 2005. 3. Duties of Consultant. During the term of this Agreement, Consultant shall provide the Company with such regular and customary advice as is reasonably requested by the Company, within the scope of the Services enumerated below. It is understood and acknowledged by the parties that the value of Consultant's advice cannot be readily quantified, and that Consultant shall be obligated to render advice upon the request of the Company, in good faith, but not be obligated to spend any specific amount of time so doing. Consultant's duties shall include, but will not be limited to, providing recommendations concerning one or more of the following related matters upon the request of the Board of Directors of the Company and/or its President. a. Assisting in the introduction of the Company to registered representatives at various registered broker/dealers; b. Arranging, on behalf of the Company, meetings with securities analysts of regional investment banking firms; c. Rendering financial advice with regard to corporate matters; d. Furnishing advice to the Company in connection with prospective acquisitions and/or merger candidates; e. Participating as a financial advisor at meetings of the Company's Board of Directors or any committee thereof; f. Using its best efforts to cause research reports concerning the Company to be written and disseminated by investment banking firms; and g. Using its best efforts to provide the Company with market-makers in its Common Stock, which market-makers have not previously made a market in the Company's securities; The Company may, at any time, request additional duties and services of the Consultant. The Consultant will provide the Company a fee structure for such additional services upon request. 4. Compensation. In consideration for the Services to be rendered by the Consultant to the Company pursuant to this Agreement, the Company shall pay to the Consultant $3,000 on the first day of each month during that month during the term of this Agreement commencing _______________, 2002. 5. Expenses. The Company will promptly reimburse Consultant for all reasonable and required out-of-pocket expenses properly incurred by the Consultant in performance of this Agreement provided that the Company has approved such expenses in advance and provided further that a written accounting, reasonable and acceptable to the Company is made by the Consultant. 6. Confidentiality. Consultant acknowledges that as a consequence of its relationship with the Company, it has been and will continue to be given access to ideas, trade secrets, methods, customer information, business plans and other confidential and proprietary information of the Company (collectively, "Confidential Information"). Consultant agrees that it shall maintain in confidence and shall not disclose directly or indirectly to any third parties for use for any purposes (other than the performance hereof) the Confidential Information for the term of this Agreement and a period of two years thereafter, unless previously approved by the Company in writing. The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Section 6 are not performed by the Consultant in accordance with the specific terms or are otherwise breached by the Consultant. It is accordingly agreed that the Company shall be entitled to an injunction or injunctions to prevent breaches of this Section 6 and to enforce specifically the terms and provisions hereof in any court of the United States or any State having jurisdiction in addition to any other remedy to which they are entitled at law or in equity. Upon termination of the Agreement, the Consultant shall immediately return all Confidential Information related to the Company under this Agreement. 7. Compliance with Law. The Consultant agrees that in performing this Agreement the Consultant shall comply with the applicable provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934, as amended, the applicable rules and regulations of the Securities and Exchange Commission thereunder, the statutes of any state security commissions 2 and departments, the applicable rules and regulations of the National Association of Securities Dealers, Inc. and any other applicable federal, state or foreign laws, rules and regulations. 8. Indemnity. The Consultant shall indemnify the Company, its directors, officers, stockholders, representatives, agents and affiliates (collectively, the "Affiliated Parties") from and against any and all claims, losses, damages, fines, fees, penalties, deficiencies, expenses, including expenses of investigations, court costs and fees and expenses of attorneys which the Company or its Affiliated Parties may sustain at any time resulting from, arising out of or relating to the breach or failure to comply with any of the covenants or agreements of the Consultant or its Affiliated Parties contained in this Agreement. The Company shall indemnify the Consultant, its directors, officers, stockholders, representatives, agents and affiliates from and against any and all claims, losses, damages, fines, fees, investigations, court costs and fees and expenses of attorneys which the Consultant or its affiliated parties may sustain at any time resulting from, arising out of or relating to the breach or failure to comply with any of the covenants or agreements of the Company or as a result of any untrue statement or fact provided by the Company to the Consultant in the performance of its services under this Agreement. 9. Applicable Law. This Agreement shall be governed by the internal laws of the State of Colorado without regard to its conflict of law provisions. If the foregoing sets forth your understanding of our Agreement, kindly indicate your compliance on the space provided below. AGREED AND ACCEPTED BY: NATURAL GAS SERVICES GROUP, INC. By: ------------------------------------ ----------------------------------- Date Its: ----------------------------------- NEIDIGER, TUCKER, BRUNER, INC. By: ------------------------------------ ----------------------------------- Anthony B. Petrelli, Vice President Date 3 EX-5.1 8 d96705a1exv5w1.txt OPINION OF DORSEY & WHITNEY LLP EXHIBIT 5.1 [DORSEY & WHITNEY LLP LETTERHEAD] July 16, 2002 Natural Gas Services Group, Inc. 2911 SCR 1260 Midland, TX 78706 Ladies and Gentlemen: Natural Gas Services Group, Inc. ("Natural Gas") has requested our opinion as to certain matters that relate to the issuance of the shares of $0.01 par value common stock ("Common Stock") and warrants to purchase Common Stock ("Warrants") which are described on the cover page of Registration Statement No. 333-88314 Natural Gas has filed with the United States Securities and Exchange Commission. We have reviewed the Articles of Incorporation, as amended, of Natural Gas, the minutes of the board of directors and of the shareholders of Natural Gas and such other documents that we considered necessary in order to render this opinion. In conducting such review, we have assumed (i) that all signatures are genuine, (ii) that all documents and instruments submitted to us as copies conform with the originals, and (iii) the due execution and delivery of all documents where due execution and delivery are a prerequisite to the effectiveness thereof. As to any facts material to this opinion, we have relied upon statements and representations of officers and other representatives of Natural Gas and certificates of public officials and have not independently verified such facts. Based solely on the foregoing, we are of the opinion that the shares of Common Stock and Warrants are validly authorized, and assuming the shares of Common Stock and Warrants are paid for as described in such Registration Statement, when issued, the shares of Common Stock and Warrants will be validly issued, fully paid and nonassessable. This opinion is limited to the applicability of the Colorado Business Corporation Act and the common law of Colorado to the issuance of the shares of Common Stock and Warrants. This opinion does not cover or in any way relate to the applicability of, or compliance by Natural Gas with, any other law, including any federal or state securities laws, the statutory or common law of any other state or any other federal law. DORSEY & WHITNEY LLP Natural Gas Services Group, Inc. July 16, 2002 Page 2 We consent to the filing of this opinion as an exhibit to the Registration Statement of Natural Gas and to Natural Gas describing this firm as having issued this opinion in the Prospectus that is a part of the Registration Statement. Sincerely yours, /s/ Dorsey & Whitney LLP EX-10.3 9 d96705a1exv10w3.txt AMENDMENT TO GUARANTY AGREEMENT EXHIBIT 10.3 AMENDMENT TO GUARANTY AGREEMENT THIS AMENDMENT (the "Amendment"), dated as of June 10, 2002, is made by and between NATURAL GAS SERVICES GROUP, INC., a Colorado corporation (the "Guarantor"), and DOMINION MICHIGAN PRODUCTION SERVICES, INC., a Michigan corporation, formerly known as Great Lakes Compression, Inc. (the "Seller"). RECITALS A. The Guarantor and the Seller are parties to a Limited Recourse Guaranty Agreement dated as of March 21, 2001 (the "Guaranty Agreement"). B. The Guarantor anticipates raising additional funds through an initial public offering of shares of its common stock and warrants to purchase shares of its common stock that is to be underwritten in part by Neidiger/Tucker/Bruner, Inc. and that is anticipated to take place in 2002. C. The Guarantor has requested that certain amendments be made to the Guaranty Agreement, which the Seller is willing to make pursuant to the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained, it is agreed as follows: 1. Capitalized terms used in this Amendment which are defined in the Guaranty Agreement shall have the same meanings as defined therein, unless otherwise defined herein. 2. Section 12 of the Guaranty Agreement is hereby amended and restated in its entirety to read as follows: "Section 12. Initial Public Offering. Guarantor presently plans to raise additional funds through a public offering (the "IPO") and agrees that to the extent Buyer has not discharged its obligations under the Purchase Money Documents, the first $3,500,000 of the net proceeds of the IPO shall be applied to the unpaid balance of the Deferred Purchase Price plus any accrued interest." 3. No Other Changes. Except as explicitly amended by this Amendment, all of the terms and conditions of the Guaranty Agreement shall remain in full force and effect. 4. Applicable Law. This Amendment shall be governed by the laws of Michigan. 5. References. All references in the Guaranty Agreement to "this Guaranty" shall be deemed to refer to the Guaranty Agreement as amended hereby and as the same may be further amended, modified or supplemented from time to time; and any and all references in the Asset Purchase Agreement to the Guaranty Agreement shall be deemed to refer to the Guaranty Agreement as amended hereby and as the same may be further amended, modified or supplemented from time to time. 6. Miscellaneous. This Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original and all of which counterparts, taken together, shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first written above. NATURAL GAS SERVICES GROUP, INC. DOMINION MICHIGAN PRODUCTION SERVICES, INC. formerly known as Great Lakes Compression, Inc. By: /s/ Wayne L. Vinson ----------------------------- Name: WAYNE L. VINSON --------------------------- Its: President ---------------------------- By: /s/ Fred G. Wood III ----------------------------------- Name: FRED G. WOOD III -------------------------------- Its: Senior Vice President ---------------------------------- -2- EX-10.14 10 d96705a1exv10w14.txt ASSET PURCHASE AGREEMENT EXHIBIT 10.14 ASSET PURCHASE AGREEMENT EXHIBIT 3(C)(1) GUARANTY AGREEMENT THIS LIMITED RECOURSE GUARANTY AGREEMENT (AS AMENDED, MODIFIED or supplemented from time to time, this "Guaranty") is made as of March 21, 2001 between NATURAL GAS SERVICES GROUP, INC., a Colorado corporation (the "Guarantor"), and GREAT LAKES COMPRESSION, INC., a Michigan corporation ("Seller"). Natural Gas Acquisition Corporation, a Colorado corporation (the "Buyer"), proposes to enter into an Asset Purchase Agreement dated as of the date hereof with the Seller (as the same may be amended from time to time and including any agreement extending the maturity of, refinancing or otherwise restructuring all or any portion of the obligations under such Agreement or any successor agreement, the "Asset Purchase Agreement"). In order to induce the Seller to enter into the Asset Purchase Agreement, the Guarantor will guaranty the obligations of the Buyer to the Seller under the Asset Purchase Agreement and the Collateral Documents (as defined in the Asset Purchase Agreement), subject to the limitations hereinafter set forth. NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Guarantor agrees as follows: Section 1. Definitions and Interpretation. Terms used in this Guaranty which are defined in the Asset Purchase Agreement shall, for the purpose of this Guaranty, have the meanings set forth in the Asset Purchase Agreement. Unless the context indicates otherwise, words used in this Guaranty in the singular number shall be deemed to include words in the plural number, and vice versa, and words in one gender shall be deemed to include words in the other genders. The section headings are for convenience only and neither limit nor amplify the provisions of this Guaranty. Section 2. Guaranty. (a) Guaranty of Buyer's Obligations. Subject to the limitations set forth in Section 2(b),the Guarantor agrees as follows: (i) The Guarantor hereby unconditionally guarantees to the Seller (A) the full and prompt payment when due (whether at maturity, by acceleration or otherwise) of all sums due by the Buyer under the Purchase Money Documents, including, without limitation, payment of the Deferred Purchase Price and all interest thereon in accordance with the terms of the Asset Purchase Agreement, and (B) the full and prompt performance by the Buyer of its other obligations under the Purchase Money Documents. (ii) This is a guaranty of payment and performance and not merely of collection. If the Buyer shall default in the payment of the Deferred Purchase Price of or interest thereon, or if there shall be a default in the performance of any of its other obligations, the Guarantor, upon demand of the Seller, shall promptly pay the Seller any amount due the Seller or perform the obligation which is in default, and the Seller shall not be required to proceed against the Buyer or any collateral for the Deferred Purchase Obligations before enforcing this Guaranty against the Guarantor. Each failure on the part of the Buyer or the Guarantor (each an "Obligor") to make a payment or perform any other obligation shall give rise to a separate cause of action hereunder. (iii) The Guarantor shall pay all costs, including court costs and reasonable attorney's fees, paid or incurred by the Seller in collecting any amount due the Seller or in performing any defaulted obligation. (b) Limitations on Guaranty. Notwithstanding anything contained in this Guaranty to the contrary, the obligations of the Guarantor under this Guaranty shall not be personal obligations of the Guarantor, and the Seller's sole recourse in satisfaction of such obligations shall be to proceed against the Pledged Collateral under the Stock Pledge Agreement and to exercise its other rights and remedies available under the Stock Pledge Agreement, the other Collateral Documents and the Asset Purchase Agreement. The foregoing limitation of the Guarantor's liability shall apply to each and every covenant, representation, warranty and other obligation of the Guarantor under this Guaranty. Section 3. Guaranty Unconditional. The obligations of the Guarantor hereunder shall be absolute, continuing and unconditional and, without limiting the generality of the foregoing, shall not be released, discharged or otherwise affected by: (a) any extension, renewal, compromise, settlement, substitution, exchange, waiver or release of any of the obligations of any other Obligor under any of the Purchase Money Documents; (b) any amendment, modification or supplement to the Asset Purchase Agreement or any Collateral Document; (c) any failure to perfect a lien granted by any of the Collateral Documents with respect to any of the Collateral or any other collateral for the Deferred Purchase Obligations, the release in whole or in part of any such lien or the release, substitution or exchange of any Collateral or other collateral for the Deferred Purchase Obligations; (d) any change in the structure, existence or ownership of the Buyer, or the filing or entry of a final order in any insolvency, bankruptcy, reorganization or other similar proceeding affecting the Buyer or its assets or releasing any Obligor from any of its obligations under any of the Purchase Money Documents; (e) the existence of any claim, set-off or other right which the Guarantor or the Buyer (separately or jointly) may have at any time against the Buyer, the Seller or any 2 other Obligor, whether arising from the execution of any of the Purchase Money Documents or otherwise; provided that nothing contained herein shall prevent the assertion of such a claim in a separate suit; (f) the unenforceability, for any reason, of any of the obligations of any other Obligor under any of the Purchase Money Documents; (g) the failure of the Seller (A) to file or enforce a claim against any other Obligor (or its estate in a bankruptcy or other proceeding); (B) to give notice of the creation or incurrence by any other Obligor of any new or additional indebtedness under the Purchase Money Documents; (C) to commence any action against any Obligor; (D) to disclose to the Guarantor any facts which the Seller may now or hereafter know with regard to the Collateral; and (E) to proceed with due diligence to collect any amount due to it under any of the Purchase Money Documents or to realize upon any of the Collateral; or (h) any other act, failure to act or delay of any kind by the Buyer, any other Obligor or the Seller which might, but for the provisions of this Section 3, constitute a legal or equitable discharge of the Guarantor's obligations hereunder. Section 4. (Intentionally Omitted). Section 5. Discharge; Reinstatement in Certain Circumstances. This Guaranty shall remain in full force and effect until the entire amount of the Deferred Purchase Price and all interest thereon and all of the Buyer's other obligations under the Purchase Money Documents shall have been paid or performed in full. If at any time any payment or performance by the Buyer under any of the Purchase Money Documents is rescinded or is required to be restored or returned because of insolvency, bankruptcy, reorganization or otherwise, the Guarantor's obligations hereunder with respect to such payment or performance shall be reinstated as though such payment had been due or performance required, but not paid or performed, at the time of such rescission or requirement. The Guarantor agrees that payment or performance of any of the Buyer's obligations or other acts which toll any statute of limitations applicable to such obligations shall also toll the statute of limitations applicable to the Guarantor's liability hereunder. Section 6. Subordination of Subrogation Rights, etc. The Guarantor agrees that any rights the Guarantor may have now or in the future to be subrogated at any time to any of the Seller's rights and remedies under the Purchase Money Documents and any right to indemnification, contribution or reimbursement that the Guarantor may have against the Buyer shall be fully subordinated to the Seller's rights under the Purchase Money Documents, and no such right of subrogation, indemnification, contribution or reimbursement shall be enforced until all of the Deferred Purchase Obligations have been fully paid or performed. Section 7. Stay of Acceleration. If acceleration of the time for payment of any amount payable by the Buyer pursuant to the Purchase Money Documents is stayed upon insolvency or bankruptcy, such amount and all other amounts subject to acceleration 3 under the terns of the Purchase Money Documents shall, nevertheless, be payable by the Guarantor on demand by the Seller. Section 8. Rights of Seller Not Impaired. No act or omission of any kind or at any time upon the part of the Seller in respect of any matter whatsoever shall in any way affect or impair the rights of the Seller to enforce any right, power or benefit of the Seller under this Guaranty, and no set-off, claim, diminution of any obligation or defense of any kind or nature which the Guarantor has or may have against the Seller shall be available against the Seller in any suit or action brought by the Seller to enforce any of is rights under this Guaranty. Nothing in this Guaranty shall be construed as a waiver by any of the Guarantor of any rights or claims it may have against the Seller under this Guaranty or otherwise, but any recovery upon such rights and claims shall be had from the Seller separately, it being the intent of this Guaranty that the Guarantor shall be unconditionally and absolutely obligated to perform fully all of its obligations hereunder for the benefit of the Seller. Section 9. Distributions to Guarantor. Upon any dissolution, winding-up, liquidation or reorganization of the Buyer, any payment or distribution of assets of any kind or character, whether in cash, property or securities, to which the Guarantor would be entitled shall be paid or delivered directly to the Seller to be applied to the payment of the Buyer's obligations under the Purchase Money Documents before any payment or distribution is made to the Guarantor. If, notwithstanding the foregoing, the Guarantor shall receive any dividend, payment or distribution of assets of the Buyer to which it is not entitled under the provisions of this Section, the Guarantor will hold such payment in trust for the benefit of the Seller and will forthwith turn such payment over to the Seller to be applied to the payment of the Buyer's obligations under the Purchase Money Documents. Section 10. Representations of Guarantor. The Guarantor hereby represents and warrants the following to the Seller: (a) Corporate Existence and Power. The Guarantor is a corporation duly incorporated, validly existing and in good standing under the laws of Colorado, and has all corporate powers and material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. The Guarantor and each Subsidiary is duly qualified as a foreign corporation, licensed and in good standing in each jurisdiction where qualification or licensing is required by the nature of its business or the character and location of its property, business or customers and in which the failure to so qualify or be licensed, as the case may be, in the aggregate, could have a material adverse effect on the business, financial position, results of operations, properties or prospects of the Guarantor and its Consolidated Subsidiaries, considered as a whole. Attached hereto as Exhibit A is an accurate and complete list of all of the Subsidiaries of the Guarantor as of the date hereof. (b) Corporate and Governmental Authorization; Contravention. The execution, delivery and performance by the Guarantor of this Guaranty are within its corporate power, have been duly authorized by all necessary corporate action, require no 4 action by or in respect of, or filing with, any governmental body agency or official and do not contravene, or constitute (with or without the giving of notice or lapse of time or both) a default under, any provision of applicable law or of the articles of incorporation or by-laws of the Guarantor or of any agreement that has not been waived by all necessary parties, or any judgment, injunction, order, decree or other instrument binding upon or affecting the Guarantor or result in the creation or imposition of any Lien upon any of its assets. (c) Valid and Binding Agreement. This Guaranty constitutes a valid and binding agreement of the Guarantor, enforceable against the Guarantor in accordance with its terms, except as the enforceability hereof may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and by equitable principles of general applicability (regardless of whether such enforceability is considered in a proceeding in equity or at law). (d) Financial Information. The consolidated balance sheet of the Guarantor and its Consolidated Subsidiaries as of December 31, 1999 and the related consolidated statements of operations and cash flow for the fiscal year then ended, reported on by HEIN + ASSOCIATES, LLP, copies of which have been delivered to the Seller, fairly present, in conformity with GAAP, the consolidated financial position of the Guarantor and its Consolidated Subsidiaries as of such date and their results of operations and changes in financial position for such fiscal year. As of the date of such financial statements, the Guarantor and its Consolidated Subsidiaries did not have any material contingent obligation, contingent liability or liability for Taxes, long-term lease or unusual forward or long-term commitment, which is not reflected in any of such financial statements or notes thereto. Attached hereto as Exhibit B is an accurate and complete list of all Debt of the Guarantor or any of its Subsidiaries outstanding as of the date hereof. Attached hereto as Exhibit C is an accurate and complete list of all Liens on any property or asset of the Guarantor or any of its Subsidiaries as of the date hereof. (e) Unaudited Financial Information. The unaudited balance sheet of the Guarantor and its Consolidated Subsidiaries as of December 31, 2000 and the related unaudited statements of income and expense for the 12 months then ended, copies of which have been delivered to the Seller, fairly present, in conformity with GAAP applied on a basis consistent with the financial statements referred to in clause (d) of this Section, the financial position of the Guarantor and its Consolidated Subsidiaries as of such date and its results of operations and changes in financial position for such 12-month period (subject to normal year-end adjustments). (f) No Material Adverse Change. Since December 31, 2000, there has been no material adverse change in the business, financial position, results of operations or prospects of the Guarantor and its Consolidated Subsidiaries, taken as a whole. (g) Litigation. There is no action, suit or proceeding pending against, or to the knowledge of the Guarantor threatened against or affecting, the Guarantor or its Subsidiaries before any governmental authority in which there is a reasonable possibility of an adverse decision which could materially adversely affect the business, financial 5 position or results of operations of the Guarantor and its Consolidated Subsidiaries or which in any manner draws into question the validity of this Guaranty or any other Purchase Money Document and there is no basis known to the Guarantor for any such action, suit or proceeding. (h) Taxes. The Guarantor and its Subsidiaries have filed all United States Federal income tax returns and all other material tax returns which are required to be filed by it and have paid all Taxes due pursuant to such returns or pursuant to any assessment received by the Guarantor or any Subsidiary. The charges, accruals and reserves on the books of the Guarantor and its Consolidated Subsidiaries in respect of Taxes or other governmental charges are, in the opinion of the Guarantor, adequate. (i) Capitalization of Buyer and Subsidiaries. The Guarantor has contributed capital to the Buyer and each of its Subsidiaries that is adequate for the Buyer and each Subsidiary to operate in a prudent and businesslike manner its business of manufacturing, fabricating, selling and leasing natural gas compressors and gas compressor equipment and providing service and maintenance associated therewith. (j) Guarantor's Additional Capitalization. On or before the date of this Guaranty, the Guarantor's Subsidiary, NGE Leasing, Inc. (the "Issuer"), has received not less than $1,200,000 from third party accredited investors (the "Investors") and has issued to the Investors the Issues Series A 10% Subordinated Notes due December 31, 2006 in a like aggregate amount and guaranteed by the Guarantor (the "Subordinated Notes"), together with five year warrants to purchase the Guarantor's common stock exercisable at $3.25 per share, all in accordance with the terms of the Confidential Offering Memorandum dated October 31, 2000, as supplemented by Supplement dated December 20, 2000 (the "Offering Memorandum"). The Guarantor has furnished to the Seller a true, correct and complete copy of the Offering Memorandum, which has not been further supplemented or amended. The Offering (as defined in the Offering Memorandum) has not been terminated and has been extended until at least March 31, 2001. In undertaking the Offering, the Guarantor and the Issuer have complied with and are complying with all applicable laws and requirements of governmental authorities, including (without limitation) state and federal securities laws and regulations. (k) Subsidiaries. Each of the Guarantor's Subsidiaries is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. Section 11. Additional Covenants. For so long so long as any of the Deferred Purchase Obligations remain outstanding, the Guarantor shall comply with the following covenants, terms and conditions: (a) Information. Guarantor shall deliver or cause to be delivered to Seller the following: 6 (i) as soon as available and in any event within 120 days after the end of each fiscal year of Guarantor, a consolidated balance sheet of Guarantor and its Consolidated Subsidiaries as of the end of such fiscal year and the related statements of operations and cash flow for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail and accompanied by an opinion thereon by an Approved Auditor, which opinion shall state that such financial statements present fairly the financial position of Guarantor and its Consolidated Subsidiaries as of the date of such financial statements and the results of its operations for the period covered by such financial statements in conformity with GAAP applied on a consistent basis (except for changes in the application of which such accountants concur) and shall not contain any "going concern" or like qualification or exception or qualifications arising out of the scope of the audit; (ii) as soon as available and in any event within 30 days after the end of each of the first eleven months of each fiscal year of Guarantor, a balance sheet of Guarantor and its Consolidated Subsidiaries and the related statements of operations and cash flow for such month and for the portion of Guarantor's fiscal year ended at the end of such month, setting forth in each case in comparative form the figures for the corresponding month and the corresponding portion of Guarantor's previous fiscal year, all certified (subject to normal year-end audit adjustments) as complete and correct by the chief financial officer or chief accounting officer of Guarantor; (iii) simultaneously with the delivery of each set of financial statements referred to in clauses (i) and (ii) above, a certificate of the chief financial officer or chief accounting officer of Guarantor, (A) stating whether Buyer has paid all of the Deferred Purchase Price required to be paid as of such date under Section 4(b)(3) of the Asset Purchase Agreement, (B) stating whether there exists on the date of such certificate any Event of Default or Default and, if any Event of Default or any Default then exists, setting forth the details thereof and the action which Guarantor is taking or proposes to take with respect thereto and (C) stating whether, since the date of the most recent previous delivery of financial statements pursuant to clause (i) or (ii) of this Section, there has been any material adverse change in the business, financial position, results of operations or prospects of Guarantor and its Consolidated Subsidiaries, and, if so, the nature of such material adverse change; (iv) as soon as reasonably practicable after obtaining knowledge of the commencement of, or of a material threat of the commencement of, an action, suit or proceeding against Guarantor or any of its Subsidiaries which could materially adversely affect the business, properties, financial position, results of operations or prospects of Guarantor and its Consolidated Subsidiaries or which in any manner questions the validity of the Asset Purchase Agreement, this Guaranty, any Collateral Document or any of the other transactions contemplated hereby or thereby, the nature of such pending or threatened action, suit or proceeding and such additional information as may be reasonably requested by Seller; 7 (v) promptly after the occurrence of a default or event of default under the loan agreement between Guarantor and Western National Bank, as it may be amended from time to time, or under any other agreement with respect to Debt incurred by Guarantor or any of its Subsidiaries from time to time, a notice that such default or event of default has occurred and setting forth the details thereof and the action which Guarantor is taking or proposes to take with respect thereto; and (vi) from time to time such additional information regarding the financial position, results of operations or business of Guarantor or any of its Subsidiaries as Seller may reasonably request. Seller will maintain the confidentiality of all such financial information provided by the Guarantor except as Seller may deem necessary or appropriate in enforcing its rights under this Guaranty and the other Purchase Money Documents and except as Seller may be required to disclose by law, including any subpoena or court order. (b) Payment of Obligations. Guarantor will pay and discharge, and will cause the Buyer to pay and discharge, as the same shall become due and payable, (i) all its obligations and liabilities, including all claims or demands of materialmen, mechanics, carriers, warehousemen, landlords and other like persons which, in any such case, if unpaid, might by law give rise to a Lien upon any of its property or assets, and (ii) all lawful Taxes, assessments and charges or levies made upon it or its property or assets, by any governmental authority, except where any of the items in clause (i) or (ii) above may be diligently contested in good faith by appropriate proceedings, and Guarantor shall have set aside on its books, if required under GAAP, appropriate reserves for the accrual of any such items. (c) Maintenance of Property; Insurance. Guarantor will keep and will cause the Buyer to keep, all property useful and necessary in its business in good working order and condition, subject to ordinary wear and tear; will maintain (either in the name of Guarantor or the Buyer or in the name of Seller if required by the Security Agreement) with financially sound and reputable insurance companies, insurance on all its properties in at least such amounts and against at least such risks (and with such risk retentions) as are usually insured against by companies engaged in the same or a similar business; and will furnish to Seller upon request full information as to the insurance carried. In addition to the foregoing general requirements, Guarantor will cause the Buyer to keep the Collateral in such condition and to maintain in effect such insurance on the Collateral as is required by the terms of the Collateral Documents. (d) Conduct of Business and Maintenance of Existence. Guarantor will continue, and will cause the Buyer to continue, to engage in business of the same general type as now conducted by Guarantor or the Buyer and will operate its business in a sound and prudent manner. Guarantor will preserve, renew and keep, and will cause the Buyer to preserve, renew and keep, in full force and effect its corporate existence and its rights, privileges and franchises necessary or desirable in the normal conduct of business. 8 (e) Compliance with Laws. Guarantor will comply, and will cause each of its Subsidiaries to comply, with all applicable laws, ordinances, rules, regulations, and requirements of governmental authorities (including, without limitation, ERISA and the rules and regulations thereunder) except where the necessity of compliance therewith is contested in good faith by appropriate proceedings. (f) Accounting; Inspection of Property, Books and Records. Guarantor will keep, and will cause each of its Subsidiaries to keep, proper books of record and account in which full, true and correct entries in conformity with GAAP shall be made of all dealings and transactions in relation to their respective businesses and activities, will maintain, and will cause each of its Subsidiaries to maintain, its fiscal reporting periods on the present basis and will permit, and will cause each of its Subsidiaries to permit, representatives of Seller to visit and inspect any of its properties, to examine and make abstracts from any of its books and records and to discuss its affairs, finances and accounts with its officers, employees and independent public accountants, all at such reasonable times and as often as may reasonably be desired. Seller will maintain the confidentiality of all such books and records and information disclosed thereby except as Seller may, deem necessary or appropriate in enforcing its rights under this Guaranty and the other Purchase Money Documents and except as Seller may be required to disclose by law, including any subpoena or court order. (g) Restricted Payments. The Guarantor will not, and will not permit any of its Subsidiaries to, (i) declare or pay (other than to Guarantor or another Subsidiary) any dividend or other distribution on any shares of Guarantor's or such Subsidiary's capital stock, (ii) make any payment (other than to Guarantor or another Subsidiary) on account of the purchase, redemption, retirement or acquisition of (A) any shares of Guarantor's or such Subsidiary's capital stock (except shares acquired upon the conversion thereof into other shares of its capital stock) or (B) any option, wan-ant or other right to acquire shares of Guarantor's or any Subsidiary's capital stock, (iii) make any payments or loans to directors, officers or shareholders of Guarantor or such Subsidiary other than reasonable salaries and benefits to officers employed on a fulltime basis by Guarantor or such Subsidiary, and other than interest payments required to be made under the terms of the Subordinated Notes, (iv) return or distribute (other than to Guarantor or another Subsidiary) any equity contributions or other types of capital to shareholders of or investors in Guarantor or any of its Subsidiaries, or (v) pay before its stated maturity (including pursuant to any right of prepayment or redemption provided therein) any of the principal amounts of the Subordinated Notes or any other Debt for which Guarantor or any of its Subsidiaries may be liable, other than Debt as may be outstanding from time to time to Western National Bank, it being the intention of the parties that all of the Deferred Purchase Obligations shall have been paid in full before Guarantor or its Subsidiaries shall be permitted to make any of the payments described in this Section 11(g) (other than payments on Debt to Western National Bank). (h) Independence of Covenants. All covenants contained herein shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that such action or condition would be permitted by an 9 exception to, or otherwise be within the limitations of another covenant shall not avoid the occurrence of a default if such action is taken or condition exists. (i) Completion of Offering; Subordination of Notes. Guarantor will diligently and in good faith use all reasonable efforts to complete as soon as practicable the Offering pursuant to the Offering Memorandum and to cause the Issuer to sell the maximum amount ($3,500,000) of the Subordinated Notes offered thereby by not later than March 31, 2001 or, in lieu thereof, Guarantor will attempt to raise an additional gross amount of $2,500,000 from other debt or equity financing by June 30, 2001. In addition, Guarantor will supplement the Offering Memorandum as necessary to provide that the Subordinated Notes shall be subordinate in right of payment to the Deferred Purchase Obligations. In any event, Guarantor will undertake, and will cause the Issuer to undertake, the Offering in accordance with all applicable laws and requirements of governmental authorities, including, without limitation, all applicable state and federal securities laws. (j) Employee Benefits. (i) Certain Definitions. As used in this Section 11, the following terms have the following meanings: "Code" means the Internal Revenue Code of 1986, as amended. "Controlled Group" means all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Guarantor, are treated as a single employer under Section 414(b) or 414(c) of the Code. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Plan" means at any time an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code and is either (i) maintained by a member of the Controlled Group for employees of a member or members of the Controlled Group or (ii) maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which a member of the Controlled Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions. "Unfunded Vested Liabilities" means, with respect to any Plan at any time, the amount (if any) by which (i) the present value of all vested nonforfeitable benefits under such Plan exceeds (ii) the fair market value 10 of all Plan assets allocable to such benefits, all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the Controlled Group to the PBGC or the Plan under Title IV of ERISA. (ii) Compliance with ERISA. Each member of the Controlled Group has fulfilled its obligations under the minimum funding standards of ERISA and the Code with respect to each Plan and is in compliance in all material respects with provisions of ERISA and the Code presently applicable to each Plan. No member of the Controlled Group has incurred any liability, or has entered into any transaction that is likely to cause any liability to be incurred, to the PBGC or any Plan under Title IV of ERISA. No Lien has been attached and no Person has threatened to attach a Lien on any property of the Guarantor as a result of the Guarantor's failure to comply with ERISA. (iii) Prohibited Transactions. The Guarantor will not at any time permit any Plan to: (A) engage in any "prohibited transaction", as such term is defined in Section 4975 of the Code or in Section 406 of ERISA; (B) incur any "accumulated funding deficiency", as such term is defined in Section 302 of ERISA, whether or not waived; or (C) be terminated in a manner which could result in the imposition of a Lien on the property of the Guarantor pursuant to Section 4068 of ERISA. (iv) Information. The Guarantor will deliver or cause to be delivered to the Seller if and when any member of the Controlled Group (i) gives or is required to give notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA,or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA, a copy of such notice; or (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate or appoint a trustee to administer any Plan, a copy of such notice. Section 12. Intended Public Offering. Guarantor presently plans to raise additional funds through an initial public offering ("IPO") and agrees that to the extent Buyer has not discharged its obligations under the Purchase Money Documents, the first proceeds of the IPO shall be applied to the unpaid balance of the Deferred Purchase Price plus any accrued interest. Section 13. Venue; Waiver of Jury Trial. The Guarantor agrees that any suit, action or proceeding arising out of or relating to this Guaranty may be instituted in the Circuit Court of Grand Traverse County, Michigan or in the U.S. District Court for the Western District of 11 Michigan (assuming such court has jurisdiction), at the option of the Seller, and the Guarantor hereby waives any objection which it may have to such venue and irrevocably submits to the jurisdiction of either of such courts in any such suit, action or proceeding. Nothing herein shall affect the right of the Seller to proceed against the Guarantor in any other jurisdiction. To the extent permitted by law, the Guarantor waives any right it may have to a trial by jury in any action or proceeding to enforce or collect any of the obligations of the Guarantor hereunder or otherwise relating to the Deferred Purchase Obligations or any of the Purchase Money Documents, whether such action or proceeding is instituted by the Seller, the Guarantor or any other party. Section 14. Successors and Assigns. This Guaranty shall inure to the benefit of and be binding on the parties hereto and their respective heirs, personal representatives, successors and assigns. Section 15. Severability. If any provision of this Guaranty or the application thereof in any circumstance is held to be unenforceable, the remainder of this Guaranty shall not be affected thereby and shall remain enforceable and in full force and effect. Section 16. Applicable Law. This Guaranty shall be governed by the laws of Michigan. Section 17. Notices, Demands and Requests. All notices, demands, requests and other communications required or permitted hereunder shall be in writing and shall be given in person or shall be sent by courier or by registered or certified mail, postage prepaid, return receipt requested, (i) to the Guarantor at its address set forth below opposite its signature and (ii) to the Seller at its address set forth in the Asset Purchase Agreement, or to such other persons or addresses as the party entitled to notice shall have specified by at least ten days' prior notice given to the other parties in the manner provided herein. All such notices, demands, requests and other communications shall be deemed to have been given upon receipt by the party to whom addressed. Rejection or other refusal to accept or the inability to deliver because of a changed address of which no notice was given shall not invalidate the effectiveness of any notice, demand, request or other communication, and in such case the notice shall be deemed given upon the rejection, refusal to accept or return of the notice to the sender. Section 18. Waiver. The Guarantor hereby waives, to the extent permitted by law, (i) the benefit of any homestead or similar exemption, state or federal, with respect to its obligations hereunder, (ii) notice of any of the matters referred to in Section 3 of this Guaranty, (iii) presentment, demand, protest and notice of dishonor, and (iv) any demand (except as expressly specified herein), proof or notice of nonpayment, or failure to comply with, any of the Deferred Purchase Obligations. Section 19. Amendments. This Guaranty may only be amended, modified, supplemented or terminated in writing, signed by all of the parties hereto. Section 20. Entire Agreement. This Guaranty expresses the entire understanding and all agreements between the parties. 12 Section 21. Counterparts. This Guaranty may be executed in any number of counterparts, each of which shall be an original and all of which together shall constitute but one and the same instrument. WITNESS the following signatures and seals. ADDRESS: NATURAL GAS SERVICES GROUP, INC. By: ----------------------------- ----------------------------- Name: ----------------------------- --------------------------- Title: -------------------------- GREAT LAKES COMPRESSION, INC. By: ----------------------------- Name: --------------------------- Title: -------------------------- 13 EXHIBIT A SUBSIDIARIES Rotary Gas Systems, Inc. (formerly Flare King, Inc.) NGE Leasing, Inc. Natural Gas Acquisition Corporation EXHIBIT B EXISTING DEBT To Limited Recourse Guaranty Agreement between Natural Gas Services Group, Inc. and Great Lakes Compression, Inc. LIST OF DEBT FOR NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES AS OF DECEMBER 31, 2000 (1) Line of Credit with Western National Bank $ 700,000 (2) Pickup Note with Western National Bank $ 20,349 (3) Pickup Note with Western National Bank $ 9,830 (4) Pickup Note with Western National Bank $ 14,033 (5) Irrigation Pump Loan with Western National Bank $ 311,141 (6) Compressor Note with Western National Bank $1,260,832 (7) Building and Land Note with Western National Bank $ 228,463 (8) Building and Land Note with Tom Jackson $ 93,598 (9) Accounts Payable $ 321,538 (10) Accrual $ 61,793
EXHIBIT C EXISTING LIENS Western National Bank (Mortgage and Financing Statements) THOMAS HOWARD JACKSON (SECOND LIEN UNDER DEED OF TRUST ON BUILDING AND LAND AT 2911 SCR 1260, MIDLAND, TEXAS 79706) ASSET PURCHASE AGREEMENT EXHIBIT 3(c)(2) SECURITY AGREEMENT DATED AS OF MARCH 21, 2001 BETWEEN NATURAL GAS ACQUISITION CORPORATION AND GREAT LAKES COMPRESSION, INC. TABLE OF CONTENTS ARTICLE I DEFINITIONS.........................................................1 SECTION 1.1 Defined Terms..................................................1 SECTION 1.2 UCC Definitions................................................3 ARTICLE II SECURITY INTERESTS.................................................3 SECTION 2.1 Grant of Security Interests....................................3 SECTION 2.2 Continuing Liability of the Buyer..............................4 SECTION 2.3 Sales and Collections..........................................4 SECTION 2.4 Segregation of Proceeds........................................4 SECTION 2.5 Verification of Receivables....................................5 SECTION 2.6 Release of Collateral..........................................5 ARTICLE III REPRESENTATIONS AND WARRANTIES....................................6 SECTION 3.1 Validity of Security Agreement; Consents.......................6 SECTION 3.2 Title to Collateral............................................6 SECTION 3.3 Validity, Perfection and Priority of Security Interests........6 SECTION 3.4 Enforceability of Receivables and Other Intangibles............7 SECTION 3.5 Place of Business; Location of Collateral......................7 SECTION 3.6 Trade Names....................................................8 SECTION 3.7 Patents and Trademarks.........................................8 ARTICLE IV COVENANTS..........................................................8 SECTION 4.1 Perfection of Security Interests...............................8 SECTION 4.2 Further Actions................................................8 SECTION 4.3 Change of Name, Identity or Structure..........................9 SECTION 4.4 Place of Business and Collateral...............................9 SECTION 4.5 Fixtures......................................................10 SECTION 4.6 Maintenance of Records........................................10 SECTION 4.7 Compliance with Laws, etc.....................................10 SECTION 4.8 Payment of Taxes, etc.........................................10 SECTION 4.9 Compliance with Terms of Agreements...........................10 SECTION 4.10 Limitation on Liens on Collateral.............................10 SECTION 4.11 Limitations on Modifications of Receivables and Other Intangibles; No Waivers or Extensions ........................10 SECTION 4.12 Maintenance of Insurance......................................11 SECTION 4.13 Limitations on Dispositions of Collateral.....................11 SECTION 4.14 Further Identification of Collateral..........................12 SECTION 4.15 Notices.......................................................12 SECTION 4.16 Change of Law.................................................12 SECTION 4.17 Right of Inspection...........................................12 SECTION 4.18 Maintenance of Equipment......................................12
-i- SECTION 4.19 Covenants Regarding Patent and Trademark Collateral...........12 SECTION 4.20 Reimbursement Obligation......................................14 ARTICLE V REMEDIES; RIGHTS UPON DEFAULT......................................14 SECTION 5.1 UCC Rights....................................................14 SECTION 5.2 Payments on Collateral........................................14 SECTION 5.3 Possession of Collateral......................................14 SECTION 5.4 Sale of Collateral............................................15 SECTION 5.5 Rights of Purchasers..........................................15 SECTION 5.6 Additional Rights of the Seller...............................16 SECTION 5.7 Remedies Not Exclusive........................................16 SECTION 5.8 Waiver and Estoppel...........................................16 SECTION 5.9 Power of Attorney.............................................17 SECTION 5.10 Application of Proceeds.......................................18 ARTICLE VI MISCELLANEOUS.....................................................18 SECTION 6.1 Notices.......................................................18 SECTION 6.2 No Waivers....................................................18 SECTION 6.3 Compensation and Expenses of the Seller.......................19 SECTION 6.4 Indemnification...............................................19 SECTION 6.5 Amendments, Supplements and Waivers...........................19 SECTION 6.6 Successors and Assigns........................................19 SECTION 6.7 Limitation of Law; Severability...............................19 SECTION 6.8 Governing Law.................................................20 SECTION 6.9 Counterparts; Effectiveness...................................20 SECTION 6.10 Termination; Survival.........................................20
-ii- SECURITY AGREEMENT This SECURITY AGREEMENT (as amended, supplemented or modified from time to time, this "Security Agreement") is dated as of March 21, 2001 and is between NATURAL GAS ACQUISITION CORPORATION, a Colorado corporation (the "Buyer"), and GREAT LAKES COMPRESSION, INC., a Michigan corporation (the "Seller"). The Buyer proposes to enter into an Asset Purchase Agreement dated as of the date hereof with the Seller (as the same may be amended from time to time and including any agreement extending the maturity of, refinancing or otherwise restructuring all or any portion of the obligations under such Agreement or any successor agreement, the "Asset Purchase Agreement"). In order to induce the Seller to enter into the Asset Purchase Agreement, the Buyer has agreed to enter into this Security Agreement. ARTICLE I DEFINITIONS SECTION 1.1 Defined Terms. Unless otherwise defined herein, as used in this Security Agreement, terms defined in the Asset Purchase Agreement shall have their defined meanings when used herein, and the following terms shall have the following meanings: "Account Debtor" means, with respect to any Receivable or Other Intangible, any Person obligated to make payment thereunder, including without limitation any account debtor thereon. "Business Day" means a day other than a Saturday, Sunday or other day on which commercial banks are authorized to close under the laws of the State of Michigan. "Collateral" has the meaning set forth in Section 2.1 of this Security Agreement. "Equipment" means all equipment now owned or hereafter acquired by the Buyer, including all items of machinery, equipment, furnishings and fixtures of every kind, whether affixed to real property or not, as well as all automobiles, trucks and vehicles of every description, trailers, handling and delivery equipment, all additions to, substitutions for, replacements of or accessions to any of the foregoing, all attachments, components, parts (including spare parts) and accessories whether installed thereon or affixed thereto and all fuel for any thereof. "Inventory" means all inventory now owned or hereafter acquired by the Buyer, including (i) all goods and other personal property, including but not limited to compressors, which are held for sale or lease or are furnished or are to be furnished under a contract of service or which constitute raw materials, work in process or materials used or consumed or to be used or consumed in the Buyer's business, (ii) all inventory, wherever located, evidenced by negotiable and non-negotiable documents of title, warehouse receipts and bills of lading, (iii) all of the Buyer's rights in, to and under all purchase orders now owned or hereafter received or acquired by it for goods or services and (iv) all rights of the Buyer as an unpaid seller, including rescission, replevin, reclamation and stopping in transit. -1- "License" means, with respect to any Patent, any agreement granting any right to practice any invention covered by any Patent and, with respect to any Trademark, any agreement granting any right to use any Trademark, and "Licenses" means all of such Licenses. "Obligations" means (i) all amounts now or hereafter payable by the Buyer to the Seller under the Asset Purchase Agreement, including, without limitation, the Deferred Purchase Price and interest thereon, (ii) all other obligations or liabilities now or hereafter payable by the Buyer pursuant to the Asset Purchase Agreement, and (iii) all obligations and liabilities now or hereafter payable by the Buyer under, arising out of or in connections with this Security Agreement or any other Collateral Document. "Other Intangibles" means all accounts, accounts receivable, contract rights, documents, instruments, chattel paper, money and general intangibles now owned or hereafter acquired by the Buyer including, without limitation, all customer lists, permits, federal and state tax refunds, reversionary interests in pension plan assets, Trademarks, Patents, Licenses, copyrights and other rights in intellectual property, other than Receivables. "Patent" means all letters patent of the United States or any other county, and all applications for letters patent of the United States or any other county, in which the Buyer may now or hereafter have any right, title or interest and all reissues, continuations, continuations-in part or extensions thereof. "Proceeds" means all proceeds, including (i) whatever is received upon any collection, exchange, sale or other disposition of any of the Collateral and any property into which any of the Collateral is converted, whether cash or non-cash, (ii) any and all payments or other property (in any form whatsoever) made or due and payable on account of any insurance, indemnity, warranty or guaranty payable to the Buyer with respect to any of the Collateral, (iii) any and all payments (in any form whatsoever) made or due and payable in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Collateral by any governmental body, authority, bureau or agency (or any person, corporation, agency, authority or other entity acting under color of any governmental authority), (iv) any claim of the Buyer against third parties for past, present or future infringement of any Patent or for past, present or future infringement or dilution of any Trademark or for injury to the goodwill associated with any Trademark or for the breach of any License and (v) any and all other amounts from time to time paid or payable under or in connection with any of the Collateral. "Real Estate" means all real property and all buildings, plants, furnishing or fixtures or other improvements to or construction on real property now owned or hereafter acquired by the Buyer, and all leasehold interests now owned or hereafter acquired by the Buyer in real property. "Receivables" means all accounts now or hereafter owing to the Buyer, and all accounts receivable, contract rights, documents, instruments or chattel paper representing amounts payable or monies due or to become due to the Buyer, arising from the sale of Inventory or the rendition of services in the ordinary course of business or otherwise (whether or not earned by performance), together with all Inventory returned by or reclaimed from customers wherever such Inventory is located, and all guaranties, securities and liens held for the payment of any such account, account receivable, contract right, document, instrument or chattel paper. -2- "Trademark" means all right, title or interest which the Buyer may now or hereafter have in any or all trademarks, tradenames, corporate names, company names, business names, fictitious business names, trade styles, service marks, logos, other source of business identifiers, prints and labels on which any of the foregoing have appeared or appear, designs and general intangibles of like nature, now existing or hereafter adopted or acquired, all registration and recordings thereof and all applications in connection therewith, including without limitation, registrations, recordings and applications in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof or any other country or political subdivision thereof and all reissues, extensions or renewals thereof. "UCC" means at any time the Uniform Commercial Code as the same may from time to time be in effect in the State of Michigan, provided that, if, by reason of mandatory provisions of law, the validity or perfection of any security interest granted herein is governed by the Uniform Commercial Code as in effect in a jurisdiction other than Michigan then, as to the validity or perfection of such security interest, "UCC" shall mean the Uniform Commercial Code in effect in such other jurisdiction. SECTION 1.2 UCC Definitions. The uncapitalized terms "account", "account debtor", "chattel paper", "contract right". "document", "warehouse receipt", "bill of lading", "document of title", "instrument", "inventory", "equipment", "fixtures", "general intangible", "money", "proceeds" and "purchase money security interest" as used in Section 1.1 or elsewhere in this Agreement have the meanings of such terms as defined in the UCC. ARTICLE II SECURITY INTERESTS SECTION 2.1 Grant of Security Interests. To secure the due and punctual payment of all Obligations, howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, now or hereafter existing or due or to become due, in accordance with the terms thereof and to secure the due and punctual performance of all of the obligations of the Buyer contained in the Asset Purchase Agreement and in the other Collateral Documents to which it is a party and in order to induce the Seller to enter into the Asset Purchase Agreement, the Buyer hereby grants to the Seller a security interest in all of the Buyer's right, title and interest in, to and under the following, whether now existing or hereafter acquired (all of which are herein collectively called the "Collateral"): (a) all Receivables; (b) all Other Intangibles; (c) all Equipment; (d) all Inventory; (e) to the extent not included in the foregoing, all other personal property, whether tangible or intangible, and wherever located, including, but not limited to, the balance of every deposit account now or hereafter existing of the Buyer with any bank and all monies of the Buyer and all rights to payment of money of the Buyer; -3- (f) to the extent not included in the foregoing, all books, ledgers and records and all computer programs, tapes, discs, punch cards, data processing software, transaction files, master files and related property and rights (including computer and peripheral equipment) necessary or helpful in enforcing, identifying or establishing any item of Collateral; and (g) to the extent not otherwise included, all Proceeds and products of any or all of the foregoing, whether existing on the date hereof or arising hereafter. SECTION 2.2 Continuing Liability of the Buyer. Anything herein to the contrary notwithstanding, the Buyer shall remain liable to observe and perform all the terms and conditions to be observed and performed by it under any contract, agreement, warranty or other obligation with respect to the Collateral, and shall do nothing to impair the security interests herein granted. The Seller shall not have any obligation or liability under any such contract, agreement, warranty or obligation by reason of or arising out of this Security Agreement or the receipt by the Seller of any payment relating to any Collateral, nor shall the Seller be required to perform or fulfill any of the obligations of the Buyer with respect to the Collateral, to make any inquiry as to the nature or sufficiency of any payment received by it or the sufficiency of the performance of any party's obligations with respect to any Collateral. Furthermore, the Seller shall not be required to file any claim or demand to collect any amount due or to enforce the performance of any party's obligations with respect to, the Collateral. SECTION 2.3 Sales and Collections. (a) The Buyer is authorized (i) to sell in the ordinary course of its business for fair value and on an arm's-length basis any of its Inventory normally held by it for such purpose and (ii) to use and consume, in the ordinary course of its business, any raw materials, supplies and materials normally held by it for such purpose. The Seller may upon the occurrence of any Event of Default, without notice, curtail or terminate such authority at any time. (b) The Buyer is authorized to collect amounts owing to it with respect to the Collateral. However, the Seller may at any time, regardless of whether an Event of Default shall have occurred, notify account debtors obligated to make payments under any or all Receivables or Other Intangibles that the Seller have a security interest in such Collateral and that payments shall be made directly to the Seller. Upon the request of the Seller at any time, the Buyer will so notify such account debtors. The Buyer will use all reasonable efforts to cause each account debtor to comply with the foregoing instruction. In furtherance of the foregoing, the Buyer authorizes the Seller (i) to ask for, demand, collect, receive and give acquittances and receipts for any and all amounts due and to become due under any Collateral and, in the name of the Buyer or its own name or otherwise, (ii) to take possession of, endorse and collect any checks, drafts, notes acceptances or other instruments for the payment of moneys due under any Collateral and (iii) to file any claim or take any other action in any court of law or equity or otherwise which it may deem appropriate for the purpose of collecting any amounts due under any Collateral. The Seller shall have no obligation to obtain or record any information relating to the source of such funds or the obligations in respect of which payments have been made. SECTION 2.4 Segregation of Proceeds -4- (a) The Seller shall have the right at any time upon the occurrence and during the continuance of a Default or an Event of Default, to cause to be opened and maintained at a financial institution selected by the Seller (the "Depository") a non-interest Searing bank account (the "Proceeds Account") which will contain only Proceeds. Any cash proceeds (as such term is defined in Section 9-3 06(l) of the UCC) received by the Seller directly from Account Debtors obligated to make payments under Receivables or Other Intangibles pursuant to Section 2.3 or from the Buyer pursuant to clause (b) of this Section 2.4, whether consisting of checks, notes, drafts, bills of exchange, money orders, commercial paper or other Proceeds received on account of any Collateral, shall be promptly deposited in the Proceeds Account, and until so deposited shall be held in trust for the Seller and shall not be commingled with any funds not constituting Proceeds of Collateral. The name in which the Proceeds Account is carried shall clearly indicate that the funds deposited therein are the property of the Buyer, subject to the security interest of the Seller hereunder. Such Proceeds, when deposited, shall continue to be security for the Obligations and shall not constitute payment thereof until applied as hereinafter provided. The Seller shall have sole dominion and control over the funds deposited in the Proceeds Account, and such funds may be withdrawn therefrom only by the Seller; provided, however, that if all Defaults and Events of Default shall have been cured by the Buyer or waived by the Seller, all collected funds on deposit in the Proceeds Account, or so much thereof as is not required to make payment of the Obligations which have become due and payable, shall be withdrawn by the Seller on the Business Day next following the day on which the Seller considers the funds deposited therein to be collected funds and disbursed to the Buyer or its order. (b) Upon notice by the Seller to the Buyer that the Proceeds Account has been opened, the Buyer shall cause all cash Proceeds collected by it to be delivered to the Seller forthwith upon receipt, in the original form in which received (with such endorsements or assignments as may be necessary to permit collection thereof by the Seller), and for such purpose the Buyer hereby irrevocably authorizes and empowers the Seller, its officers, employees and authorized Sellers to endorse and sign the name of the Buyer on all checks, drafts, money orders or other media of payment so delivered, and such endorsements or assignments shall, for all purposes, be deemed to have been made by the Buyer prior to any endorsement or assignment thereof by the Seller. The Seller may use any convenient or customary means for the purpose of collecting such checks, drafts, money orders or other media of payment. SECTION 2.5 Verification of Receivables. The Seller shall have the right to make test verifications of Receivables in any manner and through any medium that it considers advisable, and the Buyer agrees to furnish all such assistance and information as the Seller may require in connection therewith. The Buyer at its expense will cause its chief financial officer to furnish to the Seller at any time and from time to time promptly upon the Seller's request, the following reports: (i) a reconciliation of all Receivables, (ii) an aging of all Receivables, (iii) trial balances and (iv) a test verification of such Receivables as the Seller may request. SECTION 2.6 Release of Collateral (a) The Buyer may sell-or realize upon or transfer or otherwise dispose of Collateral as permitted by Section 4.13, and the security interests of the Seller in such Collateral so sold, realized upon or disposed of (but not in the Proceeds arising from such sale, realization or disposition) shall cease immediately upon such sale, realization or disposition, without any -5- further action on the part of the Seller; provided, however, that prior to such dale and release, the Buyer pays the portion of the Deferred Purchase Price, if any, attributable to such Collateral as may be required by the Asset Purchase Agreement. The Seller, if requested in writing by the Buyer but at the expense of the Buyer, is hereby authorized and instructed to deliver to the Account Debtor or the purchaser or other transferee of any such Collateral a certificate stating that the Seller no longer have a security interest therein, and such account debtor or such purchaser or other transferee shall be entitled to rely conclusively on such certificate for any and all purposes. (b) Upon the payment in full of all of the Obligations, incur obligations or otherwise give value, the Seller will (as soon as reasonably practicable after receipt of notice from the Buyer requesting the same but at the expense of the Buyer) send the Buyer, for each jurisdiction in which a UCC financing statement is on file to perfect the security interests granted to the Seller hereunder, a termination statement to the effect that the Seller no longer claim a security interest under such financing statement. ARTICLE III REPRESENTATIONS AND WARRANTIES The Buyer represents and warrants that: SECTION 3.1 Validity of Security Agreement; Consents. The execution, delivery and performance of this Security Agreement and the creation of the security interests provided for herein (i) are within the Buyer's corporate power, (ii) have been duly authorized by all necessary corporate action, including the consent of shareholders where required, on behalf of the Buyer, (iii) are not in contravention of any provision of the Buyer's articles of incorporation or by-laws, (iv) do not violate any law or regulation or any order or decree of any court or governmental instrumentality applicable to the Buyer, (v) do not conflict with or result in a breach of, or constitute a default under, any indenture, mortgage, deed of trust, lease, agreement or other instrument to which the Buyer is a party or by which it or any of its properties is bound, (vi) do not result in the creation or imposition of any Lien upon any property of the Buyer other than in favor of the Seller and (vii) do not require the consent or approval of any Government or other person other than those that have been obtained. This Security Agreement has been duly executed and delivered by the Buyer and constitutes the legal, valid and binding agreement of the Buyer, enforceable against it in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting the enforceability of creditors' rights generally and by general provisions of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). SECTION 3.2 Title to Collateral. Except for the security interests granted to the Seller pursuant to this Security Agreement, Buyer has such title to the Collateral as Seller had when Seller conveyed, assigned and transferred the Collateral to Buyer under the Asset Purchase Agreement. SECTION 3.3 Validity, Perfection and Priority of Security Interests. -6- (a) By complying with Section 4.1, the Buyer will have created a valid security interest in favor of the Seller in all existing Collateral and in all identifiable Proceeds of such Collateral, which security interest (except in respect of motor vehicles for which the exclusive manner of perfecting a security interest therein is by noting such security interest in the certificate of title in accordance with local law) would be prior to the claims of a trustee in bankruptcy under Section 544(a) of the United States federal Bankruptcy Code. Continuing compliance by the Buyer with the provisions of Section 4.2 will also (i) create valid security interests in favor of the Seller in all Collateral acquired after the date hereof and in all identifiable Proceeds of such Collateral and (ii) cause such security interests in all Collateral and in all Proceeds which are (A) identifiable cash Proceeds of Collateral covered by financing statements required to be filed hereunder, (B) identifiable Proceeds in which a security interest may be perfected by such filing under the UCC and (C) any Proceeds in the Proceeds Account to be duly perfected under the UCC, in each case prior to the claims of a trustee in bankruptcy under the United States federal Bankruptcy Code. (b) The security interests of the Seller in the Collateral rank first in priority, except that the priority of the security interests may be subject to Permitted Liens. Other than financing statements or other similar documents perfecting the security interests or deed of trust liens of the Seller, no financing statements, deeds of trust, mortgages or similar documents covering all or any part of the Collateral are on file or of record in any government office in any jurisdiction in which such filing or recording would be effective to perfect a security interest in such Collateral, nor is any of the Collateral in the possession of any Person (other than the Buyer) asserting any claim thereto or security interest therein. SECTION 3.4 Enforceability of Receivables and Other Intangibles. To the best knowledge of the Buyer, each Receivable and Other Intangible is a valid and binding obligation of the related account debtor in respect thereof, enforceable in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general provisions of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law), and complies with any applicable legal requirements except that no representation or warranty is made as to any such Receivable or Other Intangible conveyed by Seller to Buyer pursuant to the Asset Purchase Agreement. SECTION 3.5 Place of Business; Location of Collateral. Schedule 1 correctly sets forth the Buyer's chief executive office and is principal place of business and the offices of the Buyer where records concerning Receivables and Other Intangibles are kept. Schedule 2 correctly sets forth the location of all Equipment and Inventory, other than rolling stock, aircraft, goods in transit and Inventory sold in the ordinary course of business as permitted by Section 4.13 of this Security Agreement. Except as otherwise specified on Schedule 2, all Inventory and Equipment has been located at the addresses specified on Schedule 2 while owned by the Buyer. All Inventory produced by Buyer has been and will be produced in compliance with the Fair Labor Standards Act, 29 U.S.C. 201-219. No Inventory is evidenced by a negotiable document of title, warehouse receipt or bill of lading. No non-negotiable document of title, warehouse receipt or bill of lading has been issued to any person other than the Buyer, and the Buyer has retained possession of all of such non-negotiable documents, warehouse receipts and bills of lading. No amount payable under or in connection with any of the Collateral is evidenced by promissory -7- notes or other instruments. The real estate listed in Schedule 3 constitutes all existing Real Estate. SECTION 3.6 Trade Names. Any and all trade names, division names, assumed names or other names under which the Buyer transacts, or within the four-month period prior to the date hereof has transacted, business are specified on Schedule 4. SECTION 3.7 Patents and Trademarks. As of the date hereof the Buyer does not have any Patents, Patent Licenses, Trademarks or Trademark Licenses. ARTICLE IV COVENANTS The Buyer covenants and agrees with the Seller that until the payment in full of all Obligations, the Buyer will comply with the following. SECTION 4.1 Perfection of Security Interests. The Buyer will, at its expense, cause all filings and recordings and other actions specified on Schedule 5 to have been completed on or prior to the date of the first Borrowing under the Asset Purchase Agreement. SECTION 4.2 Further Actions. (a) At all times the Buyer will, at its expense, comply with the following: i. as to all Receivables, Other Intangibles, Equipment and Inventory, it will cause UCC financing statements and continuation statements to be filed and to be on file in all applicable jurisdictions as required to perfect the security interests granted to the Seller hereunder, to the extent that applicable law permits perfection of a security interest by filing under the UCC; ii. as to all Proceeds, it will cause all UCC financing statements and continuation statements filed in accordance with clause (i) above to include a statement or a checked box indicating that Proceeds of all items of Collateral described therein are covered; iii. upon the request of the Seller, it will ensure that the provisions of Section 2.4 are complied with; iv. as to any amount payable under or in connection with any of the Collateral which shall be or shall become evidenced by any promissory note or other instrument, the Buyer will immediately pledge and deliver such note or other instrument to the Seller as part of the Collateral, duly endorsed in a manner satisfactory to the Seller; v. as to all Real Estate acquired after the date hereof, the Buyer will execute and record such additional mortgages, deeds of trust or -8- other real estate security documents in such form as shall be satisfactory to the Seller so as to create a valid first priority lien thereon in favor of the Seller; and vi. as to all Patents, Patent Licenses, Trademarks or Trademark Licenses, the Buyer will effect the recordation or renewal of the recordation of the security interests of the Seller therein so as to maintain valid and perfected security interests therein under all applicable state and United States federal laws. (b) The Buyer will, from time to time and at its expense, execute, deliver, file or record such financing statements pursuant to the Uniform Commercial Code, applications for certificates of title and such other statements, assignments, instruments, documents, agreements or other papers and take any other action that may be necessary or desirable, or that the Seller may reasonably request, in order to create, preserve, perfect, confirm or validate the security interests, to enable the Seller to obtain the full benefits of this Security Agreement or to enable them to exercise and enforce any of their rights, powers and remedies hereunder, including, without limitation, their right to take possession of the Collateral, and will use its best efforts to obtain such waivers from landlords and mortgagees as the Seller may request. (c) To the fullest extent permitted by law, the Buyer authorizes the Seller to sign and file financing and continuation statements and amendments thereto with respect to the Collateral without its signature thereon. SECTION 4.3 Change of Name, Identity or Structure. The Buyer will not change its name, identity or corporate structure in any manner and, except as set forth on Schedule 4, will not conduct its business under any trade, assumed or fictitious name unless it shall have given the Seller at least thirty days' prior written notice thereof and shall have taken all action (or made arrangements to take such action substantially simultaneously with such change if it is impossible to take such action in advance) necessary or reasonably requested by the Seller to amend any financing statement or continuation statement relating to the security interests granted hereby in order to preserve such security interests and to effectuate or maintain the priority thereof against all Persons. SECTION 4.4 Place of Business and Collateral. The Buyer will not change the location of (i) its places of business, (ii) its chief executive office or (iii) the office or other locations where it keeps or holds any Collateral or any records relating thereto from the applicable location listed on Schedule 1 or 2 hereto unless, prior to such change, it notifies the Seller of such change, makes all UCC filings required by Section 4.2 and takes all other action necessary or that the Seller may reasonably request to preserve, perfect, confirm and protect the security interests granted hereby. The Buyer will in no event change the location of any Collateral if such change would cause the security interest granted hereby in such Collateral to lapse or cease to be perfected. The Buyer will at all times maintain its chief executive office within one of the forty eight contiguous states (other than Maryland or Tennessee) in which Article 9 of the U CC is in effect. -9- SECTION 4.5 Fixtures. The Buyer will not permit any Equipment to become a fixture unless it shall have given the Seller at least ten days' prior written notice thereof and shall have taken such action and delivered or caused to be delivered to the Seller all instruments and documents, including, without limitation, waivers and subordination agreements by any landlords and mortgagees, and filed all financing statements necessary or reasonably requested by the Seller, to preserve and protect the security interest granted herein and to effectuate or maintain the priority thereof against all Persons. SECTION 4.6 Maintenance of Records. The Buyer will keep and maintain at its own cost and expense complete books and records relating to the Collateral which are satisfactory to the Seller including, without limitation, a record of all payments received and all credits granted with respect to the Collateral and all of its other dealings with the Collateral. The Buyer will mark its books and records pertaining to the Collateral to evidence this Security Agreement and the security interests granted hereby. For the Seller's further security, the Buyer agrees that the Seller shall have a special property interest in all of the Buyer's books and records pertaining to the Collateral and the Buyer shall deliver and turn over any such books and records to the Seller or to its representatives at any time on demand of the Seller. SECTION 4.7 Compliance with Laws, etc. The Buyer will comply, in all material respects, with all acts, rules, regulations, orders, decrees and directions of any Government applicable to the Collateral or any part thereof or to the operation of the Buyer's business except to the extent that the failure to comply would not have a material adverse effect on the financial or other condition of the Buyer; provided, however, that the Buyer may contest any act, regulation, order, decree or direction in any reasonable manner which shall not in the sole opinion of the Seller adversely affect the Seller's rights or the first priority of its and their security interest in the Collateral. SECTION 4.8 Payment of Taxes, etc. The Buyer will pay promptly when due, all taxes, assessments and governmental charges or levies imposed upon the Collateral or in respect of its income or profits therefrom, as well as all claims of any kind (including claims for labor, materials and supplies), except that no such charge need be paid if (i) the validity thereof is being contested in good faith by appropriate proceedings and (ii) such charge is adequately reserved against in accordance with GAAP. SECTION 4.9 Compliance with Terms of Agreements. The Buyer will perform and comply in all material respects with all of its obligations under and, all agreements relating to the Collateral to which it is a party or by which it is bound. SECTION 4.10 Limitation on Liens on Collateral. The Buyer will not create, permit or suffer to exist, and will defend the Collateral and the Buyer's rights with respect thereto against and take such other action as is necessary to remove, any Lien, security interest, encumbrance, or claim in or to the Collateral other than the security interests created hereunder. SECTION 4.11 Limitations on Modifications of Receivables and Other Intangibles; No Waivers or Extensions. The Buyer will not (i) amend, modify, terminate or waive any provision of any material Receivable or Other Intangible in any manner which might have a materially adverse effect on the value of such Receivable or Other Intangible as Collateral, (ii) fail to -10- exercise promptly and diligently each and every material right which it may have under each Receivable and Other Intangible or (iii) fail to deliver to the Seller a copy of each material demand, notice or document received by it relating in any way to any Receivable or Other Intangible. The Buyer will not, without the Seller's prior written consent, grant any extension of the time of payment of any Receivable or amounts due under any material Other Intangible, compromise, compound or settle the same for less than the full amount thereof, release, wholly or partly, any person liable for the payment thereof or allow any credit or discount whatsoever thereon other than trade discounts granted in the normal course of business, except such as in the reasonable judgment of the Buyer as are advisable to enhance the collectibility thereof. SECTION 4.12 Maintenance of Insurance. The Buyer will maintain with financially sound insurance companies licensed to do business in Michigan insurance policies (i) insuring the Inventory and Equipment against loss by fire, explosion, theft and such other casualties as are usually insured against by companies engaged in the same or similar business for an amount satisfactory to the Seller and (ii) insuring the Buyer, the Seller against liability for personal injury arising from, and property damage relating to, such Inventory and Equipment, such policies to be in such form and to cover such amounts as may be satisfactory to the Seller, with deductibles no greater than the working capital of the Guarantor as of me end of each fiscal year and with losses payable to the Buyer and the Seller as their respective interests may appear. The Buyer shall, if so requested by the Seller, deliver to the Seller as often as the Seller may reasonably request a report of the Buyer or, if requested by the Seller, of an insurance broker satisfactory to the Seller of the insurance on the Inventory and Equipment. All insurance with respect to the Inventory and the Equipment shall (i) contain a standard mortgagee clause in favor of the Seller, (ii) provide that any loss shall be payable in accordance with the terms thereof notwithstanding any act of the Buyer which might otherwise result in forfeiture of such insurance [and that the insurer waives all rights of set-off, counterclaim, deduction or subrogation against the Buyer], (iii) provide that no cancellation, reduction in amount or change in coverage therefor shall be effective until at least 30 days after receipt by the Seller of written notice thereof and (iv) provide that the Seller may, but shall not be obligated to, pay premiums in respect thereof. SECTION 4.13 Limitations on Dispositions of Collateral. The Buyer will not directly or indirectly (through the sale of stock, merger or otherwise) without the prior written consent of the Seller sell, transfer, lease or otherwise dispose of any of the Collateral, or attempt, offer or contract to do so except for (i) sales or leases of Inventory in the ordinary course of its business for fair value, (ii) sales of the Acquired Assets as permitted under Section 17(f) of the Asset Purchase Agreement and (iii) so long as no Event of Default has occurred and is continuing, dispositions in a commercially reasonable manner of Equipment which has become redundant, worn out or obsolete or which should be replaced so as to improve productivity, so long as the proceeds of any such disposition are (x) used to acquire replacement equipment which has comparable or better utility and equivalent or better value and which is subject to a first priority security interest in favor of the Seller therein, except as permitted by Section 4.9 or (y) applied to repay the Obligations. The inclusion of Proceeds of the Collateral under the security interests granted hereby shall not be deemed a consent by the Seller to any sale or disposition of any Collateral other than as permitted by this Section 4.13. Sales, leases or dispositions of Collateral to an Affiliate of Seller shall comply with Section 17(l) of the Asset Purchase Agreement. -11- SECTION 4.14 Further Identification of Collateral. The Buyer will furnish to the Seller from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Seller may reasonably request. SECTION 4.15 Notices. The Buyer will advise the Seller promptly and in reasonable detail, (i) of any Lien, security interest, encumbrance or claim made or asserted against any of the Collateral, (ii) of any .material change in the composition of the Collateral, and (iii) of the occurrence of any other event which would have a material effect on the aggregate value of the Collateral or on the security interests granted to the Seller in this Security Agreement. SECTION 4.16 Change of Law. The Buyer shall promptly: (a) notify the Seller of any change in law known to it which (A) adversely affects or will adversely affect the validity, perfection or priority of the security interests granted hereby, (B) requires or will require a change in the procedures to be followed in order to maintain and protect such validity, perfection and priority or (C) could result in the Seller not having a perfected security interest in any of the Collateral; (b) furnish the Seller with an opinion of outside legal counsel satisfactory to the Seller setting forth the procedures to be followed in order (A) to avoid (or to minimize if avoidance is impossible) such adverse effect, (B) to maintain and protect such validity, perfection and priority or (C) to assure that the Seller have perfected security interests in all of the Collateral; and (c) follow the procedures set forth in such opinion of counsel. SECTION 4.17 Right of Inspection. The Seller shall at all times have full and free access during normal business hours to all the books, correspondence and records of the Buyer, and the Seller or its representatives may examine the same, take extracts therefrom, make photocopies thereof and have such discussions with officers, employees [and public accountants] of the Buyer as the Seller may deem necessary, and the Buyer agrees to render to the Seller, at the Buyer's cost and expense, such clerical and other assistance as may be reasonably requested with regard thereto. The Seller and its representatives shall at all times also have the right to enter into and upon any premises where any of the Inventory or Equipment is located for the purpose of inspecting the same, observing its use or protecting its interests therein. Seller shall maintain the confidentiality of all such books and records and information disclosed thereby except as Seller may deem necessary or appropriate in enforcing its rights under this Security Agreement and other Purchase Money Documents and except as Seller may be required to disclose by law, including any subpoena or court order. SECTION 4.18 Maintenance of Equipment. The Buyer will, at its expense, generally maintain the Equipment in good operating condition, ordinary wear and tear excepted; provided, however, Buyer shall not be required by this Section to maintain the Equipment included in the Acquired Assets in a better condition than such Equipment was maintained by Seller, ordinary wear and tear excepted. SECTION 4.19 Covenants Regarding Patent and Trademark Collateral. -12- (a) At such time as the Buyer shall acquire any Patents or Trademarks, it will comply with the terms, covenants and warranties of this Section 4.19. (b) The Buyer (either itself or through licensees) will, unless the Buyer shall reasonably determine that a Trademark is of negligible economic value to the Buyer, (A) continue to use each Trademark on each and every Trademark class of goods applicable to its current products and services as reflected in its current catalogs, brochures and price lists in order to maintain each Trademark in full force and free from any claim of abandonment for non-use, (B) maintain as in the past the quality of products and services offered under each Trademark, (C) employ each Trademark with the appropriate notice of registration, (D) not adopt or use any mark which is confusingly similar or a colorable imitation of any Trademark and (E) not (and not permit any licensee or sublicensee thereof to) do any act or knowingly omit to do any act whereby any Trademark may become invalidated. (c) The Buyer will not, unless the Buyer shall reasonably determine that a Patent is of negligible economic value to the Buyer, do any act, or omit to do any act, whereby any Patent may be abandoned or dedicated. (d) The Buyer shall notify the Seller immediately if its knows, or has reason to know, that any application or registration relating to any Patent or Trademark may become abandoned or dedicated, or of any adverse determination or development (including, without limitation, the institution of, or any such determination or development in any proceeding in the United States Patent and Trademark Office or any court or tribunal in any country) regarding the Buyer's ownership of any Patent or Trademark, its right to register the same or keep and maintain the same. (e) In no event shall the Buyer, either itself or through any employee, licensee or designee, file an application for registration of any Patent or Trademark with the United States Patent and Trademark Office or any similar office or agency in any other country or any political subdivision thereof, unless it promptly informs the Seller and, upon request of the Seller, executes and delivers any and all agreements, instruments, documents and papers as the Seller may request to evidence the Seller's security interest in such Patent or Trademark and the goodwill and general intangibles of the Buyer relating thereto or represented thereby, and the Buyer hereby constitutes the Seller its attorney-in-fact to execute and file all such writings for the foregoing purposes, all such acts of such attorney being hereby ratified and confirmed. Such power being coupled with an interest is irrevocable until the Obligations are paid and satisfied in full. (f) The Buyer will take all necessary steps, including, without limitation, in any proceeding before the United States Patent and Trademark Office or any similar office or agency in any other country or any political subdivision thereof, to maintain and pursue each application (and to obtain the relevant registration) and to maintain each registration of the Patents and Trademarks, including without limitation, filing of applications for renewal, affidavits of use and affidavits of incontestability. (g) If any of the Patent and Trademark Collateral is infringed, misappropriated or diluted by a third party, the Buyer shall promptly notify the Seller after it -13- learns thereof and shall, unless the Buyer shall reasonably determine that such Patent and Trademark Collateral is of negligible economic value to the Buyer, promptly sue for infringement, misappropriation or dilution, seek injunctive relief where appropriate and to recover any and all damages for such infringement, misappropriation or dilution, or to take such other action as the Buyer shall reasonably deem appropriate under the circumstances to protect such Patent and Trademark Collateral. SECTION 4.20 Reimbursement Obligation. Should the Buyer fail to comply with the provisions of the Asset Purchase Agreement, this Security Agreement, any other Collateral Document to which it is a party or any other agreement relating to the Collateral such that the value of any Collateral or the validity, perfection, rank or value of any security interests granted to the Seller hereunder or thereunder is thereby diminished or potentially diminished or put at risk (as reasonably determined by the Seller), the Seller on behalf of the Buyer may, but shall not be required to, effect such compliance on behalf of the Buyer, and the Buyer shall reimburse the Seller for the cost thereof on demand, and interest shall accrue on such reimbursement obligation from the date the relevant costs are incurred until reimbursement thereof in full at prime rate as published weekly in the Wall Street Journal plus 5.0%, or the maximum rate allowed by law, whichever is less. ARTICLE V REMEDIES; RIGHTS UPON DEFAULT SECTION 5.1 UCC Rights. If any Event of Default shall have occurred, the Seller may in addition to all other rights and remedies granted to it in this Security Agreement and in any other instrument or agreement securing, evidencing or relating to the Obligations, exercise all rights and remedies of a secured party under the UCC and all other rights available to the Seller at law or in equity. SECTION 5.2 Payments on Collateral. Without limiting the rights of the Seller under any other provision of the Security Agreement, if an Event of Default shall occur and be continuing: (a) all payments received by the Buyer under or in connection with any of the Collateral shall be held by the Buyer in trust for the Seller, shall be segregated from other funds of the Buyer and shall forthwith upon receipt by the Buyer be turned over to the Seller, in the same form as received by the Buyer (duly indorsed by the Buyer to the Seller, if required to permit collection thereof by the Seller); and (b) all such payments received by the Seller (whether from the Buyer or otherwise) may, in the sole discretion of the Seller, be held by the Seller as collateral security for, and/or then or at any time thereafter applied in whole or in part by the Seller to the payment of the expenses and Obligations as set forth in Section 5.10. SECTION 5.3 Possession of Collateral. In furtherance of the foregoing, the Buyer expressly agrees that, if an Event of Default shall occur and be continuing, the Seller may (i) by judicial powers, or without judicial process if it can be done without breach of the peace, enter any premises where any of such Collateral is or may be located, and without charge or liability to -14- the Seller seize and remove such Collateral from such premises and (ii) have access to and use of the Buyer's books and records relating to such Collateral. SECTION 5.4 Sale of Collateral. (a) The Buyer expressly agrees that if an Event of Default shall occur and be continuing, the Seller, without demand of performance or other demand or notice of any kind (except the notice specified below of the time and place of any public or private sale) to the Buyer or any other Person (all of which demands and/or notices are hereby waived by the Buyer), may forthwith collect, receive, appropriate and realize upon the Collateral and/or forthwith sell, lease, assign, give an option or options to purchase or otherwise dispose of and deliver the Collateral (or contract to do so) or any part thereof in one or more parcels at public or private sale, at any exchange, broker's board or at any office of the Seller or elsewhere in such manner as is commercially reasonable and as the Seller may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Seller shall have the right upon any such public sale, and, to the extent permitted by law, upon any such private sale, to purchase the whole or any part of the Collateral so sold. The Buyer further agrees, at the Seller's request, to assemble the Collateral, and to make it available to the Seller at places which the Seller may reasonably select. To the extent permitted by applicable law, the Buyer waives all claims, damages and demands against the Seller arising out of the foreclosure, repossession, retention or sale of the Collateral. (b) Unless the Collateral threatens to decline speedily in value or is of a type customarily sold in a recognized market, the Seller shall give the Buyer ten days written notice of its intention to make any such public or private sale or sale at a broker's board or on a securities exchange. Such notice shall (i) in the case of a public sale, state the time and place fixed for such sale, (ii) in the case of a sale at a broker's board or on a securities exchange, state the board or exchange at which such sale is to be made and the day on which the Collateral, or any portion thereof being sold, will first be offered for sale and (iii) in the case of a private sale, state the day after which such sale may be consummated. The Seller shall not be required or obligated to make any such sale pursuant to any such notice. The Seller may adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for the sale, and such sale may be made at any time or place to which the same may be so adjourned. In the case of any sale of all or any part of the Collateral for credit or for future delivery, the Collateral so sold may be retained by the Seller until the selling price is paid by the purchaser thereof, but the Seller shall not incur any liability in case of failure of such purchaser to pay for the Collateral so sold and, in the case of such failure, such Collateral may again be sold upon like notice. SECTION 5.5 Rights of Purchasers. Upon any sale of the Collateral (whether public or private), the Seller shall have the right to deliver, assign and transfer to the purchaser thereof the Collateral so sold. Each purchaser (including the Seller) at any such sale shall hold the Collateral so sold free from any claim or right of whatever kind, including any equity or right of redemption of the Buyer, and the Buyer, to the extent permitted by law, hereby specifically waives all rights of redemption, including, without limitation, the right to redeem the Collateral under Section 9-506 of the UCC, and any right to a judicial or other stay or approval which it has or may have under any law now existing or hereafter adopted. -15- SECTION 5.6 Additional Rights of the Seller. (a) The Seller shall have the right and power to institute and maintain such suits and proceedings as it may deem appropriate to protect and enforce the rights vested in it by this Security Agreement and may proceed by suit or suits at law or in equity to enforce such rights and to foreclose upon and sell the Collateral or any part thereof pursuant to the judgment or decree of a court of competent jurisdiction. (b) The Seller shall, to the extent permitted by law and without regard to the solvency or insolvency at the time of any Person then liable for the payment of any of the Obligations or the then value of the Collateral, and without requiring any bond from any party to such proceedings, be entitled to the appointment of a special receiver or receivers (who may be the Seller) for the Collateral or any part thereof and for the rents, issues, tolls, profits, royalties, revenues and other income therefrom, which receiver shall have such powers as the court making such appointment shall confer, and to the entry of an order directing that the rents, issues, tolls, profits, royalties, revenues and other income of the property constituting the whole or any part of the Collateral be segregated, sequestered and impounded for the benefit of the Seller, and the Buyer irrevocably consents to the appointment of such receiver or receivers and to the entry of such order. SECTION 5.7 Remedies Not Exclusive. (a) No remedy conferred upon or reserved to the Seller in this Security Agreement is intended to be exclusive of any other remedy or remedies, but every such remedy shall be cumulative and shall be in addition to every other remedy conferred herein or now or hereafter existing at law, in equity or by statute. (b) If the Seller shall have proceeded to enforce any right, remedy or power under this Security Agreement and the proceeding for the enforcement thereof shall have been discontinued or abandoned for any reason or shall have been determined adversely to the Seller, the Buyer, the Seller shall, subject to any determination in such proceeding, severally and respectively be restored to their former positions and rights under this Security Agreement, and thereafter all rights, remedies and powers of the Seller shall continue as though no such proceedings had been taken. (c) All rights of action under this Security Agreement may be enforced by the Seller without the possession of any instrument evidencing any Obligation or the production thereof at any trial or other proceeding relative thereto, and any suit or proceeding instituted by the Seller shall be brought in its name, as Seller, and any judgment shall be held as part of the Collateral. SECTION 5.8 Waiver and Estoppel. (a) The Buyer, to the extent it may lawfully do so, agrees that it will not at any time in any manner whatsoever claim or take the benefit or advantage of any appraisement, valuation, stay, extension, moratorium, turnover or redemption law, or any law now or hereafter in force permitting it to direct the order in which the Collateral shall be sold which may delay, prevent or otherwise affect the performance or enforcement of this Security Agreement and the -16- Buyer hereby waives the benefits or advantage of all such laws, and covenants that it will not hinder, delay or impede the execution of any power granted to the Seller in this Security Agreement but will permit the execution of every such power as though no such law were in force; provided that nothing contained in this Section 5.8 shall be construed as a waiver of any rights of the Buyer under any applicable federal bankruptcy law. (b) The Buyer, to the extent it may lawfully do so, on behalf of itself and all who may claim through or under it, including without limitation any and all subsequent creditors, vendees, assignees and lienors, waives and releases all rights to demand or to have any marshalling of the Collateral upon any sale, whether made under any power of sale granted herein or pursuant to judicial proceedings or upon any foreclosure or any enforcement of this Security Agreement and consents and agrees that all the Collateral may at any such sale be offered and sold as an entirety. (c) The Buyer, to the extent it may lawfully do so, waives presentment, demand, protest and any notice of any kind (except notices explicitly required hereunder) in connection with this Security Agreement and any action taken by the Seller with respect to the Collateral. SECTION 5.9 Power of Attorney. The Buyer hereby irrevocably constitutes and appoints the Seller, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of the Buyer and in the name of the Buyer or in its own name, as Seller, from time to time in the Seller's reasonable discretion for the purpose of carrying out the terms of this Security Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Security Agreement and, without limiting the generality of the foregoing, hereby gives the Seller the power and right, on behalf of the Buyer, without notice to or assent by the Buyer to do the following: (a) to pay or discharge taxes, liens, security interests or other encumbrances levied or placed on or threatened against the Collateral; (b) to effect any repairs or any insurance called for by the terms of this Security Agreement and to pay all or any part of the premiums therefor and the costs thereof; and (c) upon the occurrence and continuance of any Event of Default and otherwise to the extent provided in this Security Agreement, (A) to direct any party liable for any payment under any of the Collateral to make payment of any and all moneys due and to come due thereunder directly to the Seller or as the Seller shall direct; (B) to receive payment of and receipt for any and all moneys, claims and other amounts due and to become due at any time in respect of or arising out of any Collateral; (C) to sign and indorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications and notices in connection with accounts and other documents relating to the Collateral; (D) to commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any thereof and to enforce any other right in respect of any Collateral; (E) to defend any suit, action or proceeding brought against the Buyer with respect to any Collateral; (F) to settle, compromise and adjust any suit, -17- action or proceeding described above and, in connection therewith, to give such discharges or releases as the Seller may deem appropriate; (G) to assign any Patent or Trademark (along with the goodwill of the business to which such Trademark pertains), for such term or terms, on such conditions, and in such manner, as the Seller shall in its sole discretion determine; and (H) generally to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Seller were the absolute owner thereof for all purposes, and to do, at the Seller's option and the Buyer's expense, at any time, or from time to time, all acts and things which the Seller deems necessary to protect, preserve or realize upon the Collateral and the Seller's security interest therein, in order to effect the intent of this Security Agreement, all as fully and effectively as the Buyer might do. (d) The Buyer hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and shall be irrevocable. SECTION 5.10 Application of Proceeds. The Seller shall retain the net proceeds of any collection, recovery, receipt, appropriation, realization or sale of the Collateral and, after deducting all reasonable costs and expenses of every kind incurred therein or incidental to the care and safekeeping of any or all of the Collateral or in any way relating to the rights of the Seller hereunder, including reasonable attorneys' fees and legal expenses, apply such net proceeds to the Seller for application by them to the payment in whole or in part of the Obligations in such order as the Seller may elect, the Buyer remaining liable for any amount remaining unpaid (and any attorneys fees paid by the Seller in collecting such deficiency) after such application. Only after applying such net proceeds and after the payment by the Seller of any other amount required by any provision of law, including Section 9-504(1)(c) of the UCC, need the Seller account for the surplus, if any, to the Buyer or to whomsoever may be lawfully entitled to the same. ARTICLE VI MISCELLANEOUS SECTION 6.1 Notices. Unless otherwise specified herein, all notices, requests or other communications to any party hereunder shall be in writing and shall be given to such party at its address set forth on the signature pages hereof or any other address or which such party shall have specified for the purpose of communications hereunder by notice to the other parties hereunder. Each such notice, request or other communication shall be effective (i) if given by mail, three days after such communication is deposited, certified or registered, in the mails with first class postage prepaid, addressed as aforesaid or (ii) if given by other means, when delivered at the address specified in this Section 6.1. SECTION 6.2 No Waivers. No failure on the part of the Seller to exercise, no course of dealing with respect to, and no delay in exercising any right, power or privilege under this Security Agreement or any document or agreement contemplated hereby shall operate as a waiver thereof or shall any single or partial exercise of any such right, power or privilege preclude any other or further exercise thereof or the exercise of any other right, power or privilege. -18- SECTION 6.3 Compensation and Expenses of the Seller. The Buyer shall pay to the Seller from time to time upon demand, all of the fees, costs and expenses incurred by the Seller (including, without limitation, the reasonable fees and disbursements of counsel and any amounts payable by the Seller to any of its Sellers, whether on account of fees, indemnities or otherwise) (i) arising in connection with the preparation, administration, modification, amendment, waiver or termination of this Security Agreement or any document or agreement contemplated hereby or any consent or waiver hereunder or thereunder or (ii) incurred in connection with the administration of this Security Agreement, or any document or agreement contemplated hereby, or in connection with the administration, sale or other disposition of Collateral hereunder or under any document or agreement contemplated hereby or the preservation, protection or defense of the rights of the Seller in and to the Collateral. SECTION 6.4 Indemnification. The Buyer shall at all times hereafter indemnify, hold harmless and, on demand, reimburse the Seller, its Affiliates and their respective successors, assigns, officers and directors, employees (all of the foregoing parties, including, but not limited to, the Seller, being hereinafter collectively referred to as the "Indemnitees" and individually as an "Indemnitee") from, against and for any and all liabilities, obligations, claims, damages, actions, penalties, causes of action, losses, judgments, suits, costs, expenses and disbursements, including, without limitation, attorney's fees (any and all of the foregoing being hereinafter collectively referred to as the "Liabilities" and individually as a "Liability") which the Indemnitees, or any of them, might be or become subjected, by reason of, or arising out of the enforcement or performance of the Seller's rights under, this Security Agreement or any other document, instrument or agreement contemplated hereby or executed in connection herewith; provided that the Buyer shall not be liable to any Indemnitee for any Liability caused solely by the negligence or misconduct of such Indemnitee or for any Liability for which the Seller has agreed to indemnify the Seller under Section 22 of the Asset Purchase Agreement. In no event shall any Indemnitee, as a condition to enforcing its rights under this Section 6.4 or otherwise, be obligated to make a claim against any other Person (including, without limitation, the Seller) to enforce its rights under this Section 6.4. SECTION 6.5 Amendments, Supplements and Waivers. The Buyer and the Seller may, from time to time, enter into written agreements supplemental hereto for the purpose of adding any provisions to this Security Agreement, waiving any provisions hereof or changing in any manner the rights of the parties. SECTION 6.6 Successors and Assigns. This Security Agreement shall be binding upon and inure to the benefit of each of the parties hereto and shall inure to the benefit of the Seller and its successors and assigns. Nothing herein is intended or shall be construed to give any other Person any right, remedy or claim under, to or in respect of this Security Agreement or any Collateral. SECTION 6.7 Limitation of Law; Severability. (a) All rights, remedies and powers provided in this Security Agreement may be exercised only to the extent that the exercise thereof does not violate any applicable provision of law, and all the provisions of this Security Agreement are intended to be subject to all applicable mandatory provisions of law which may be controlling and to be limited to the extent -19- necessary so that they will not render this Security Agreement invalid, unenforceable in whole or in part, or not entitled to be recorded, registered or filed under the provisions of any applicable law. (b) If any provision hereof is invalid and unenforceable in any jurisdiction, then, to the fullest extent permitted by law, (i) the other provisions hereof shall remain in full force and effect in such jurisdiction and shall be liberally construed in order to carry out the intentions of the parties hereto as nearly as may be possible; and (ii) the invalidity or unenforceability of any provision hereof in any jurisdiction shall not affect the validity or enforceability of such provisions in any other jurisdiction. SECTION 6.8 Governing Law. This Security Agreement shall be governed by and construed in accordance with the laws of the State of Michigan. SECTION 6.9 Counterparts; Effectiveness. This Security Agreement may be signed in any number of counterparts with the same effect as if the signatures thereto and hereto were upon the same instrument. This Security Agreement shall become effective when the Seller shall receive counterparts executed by itself and the Buyer. SECTION 6.10 Termination; Survival. This Security Agreement shall terminate when the security interests granted hereunder have terminated and the Collateral has been released as provided in Section 2.6, provided that the obligations of the Buyer under any of Section 4.20, 6.3, and 6.4 shall survive any such termination. IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be duly executed by their respective authorized officers as of the day and year first written above. NATURAL GAS ACQUISITION CORPORATION By: -------------------------------- Title: ----------------------------- GREAT LAKES COMPRESSION, INC. By: -------------------------------- Title: ----------------------------- -20- SCHEDULE 1 Buyer's Chief Executive Office and Principal Place of Business 3690 County Road 491 Lewiston, MI 49756 2911 SCR 1260 Midland, TX 79706 Locations of Records of Receivables and Other Intangibles 3690 County Road 491 Lewiston, MI 49756 2911 SCR 1260 Midland, TX 79706 Schedule 1--Page 1 SCHEDULE 2 Locations of Equipment and Inventory State of Michigan. Any of such Equipment that could be considered to be a fixture is located on the Real Estate described on Schedule 3. Schedule 2--Page 1 SCHEDULE 3 Real Estate Property in the County of Montmorency, State of Michigan, legally described as: Commencing at the Northeast corner of Section 22, Town 29 North, Range 1 East, thence SO(degrees)04'3 0"E 15 71.8 feet on section line to the point of beginning; thence S89(degrees)00'10"W 660.0 feet; thence SO(degrees)04'30"E 330.0 feet; thence N89(degrees)00'10"E 660.0 feet; thence NO(degrees)04'30"W 330.0 feet on section line to the point of beginning. Part of the Southeast 1/4 of the Northeast 1/4 of Section 22, T29N, R1E, containing 5 acres more or less, except oil, gas, coal and mineral rights as reserved by a prior owner by instrument at Liber 371, Page 143. Township of Albert (West Part), County of Montmorency, and State of Michigan; and subject to easements and restrictions of record and the rights of the public and of any governmental unit in any part taken, used or deeded for street, road or highway purposes. Schedule 3--Page 1 SCHEDULE 4 Trade Names, Division Names, etc. Natural Gas Acquisition Corporation Great Lakes Compression Schedule 4--Page 1 SCHEDULE 5 Required Filings and Recordings 1. A continuing Collateral Mortgage covering Buyer's real estate will be recorded in Montmorency County, Michigan. 2. A Financing Statement will be filed centrally in the following states: Michigan Texas Colorado Schedule 5--Page 1 ASSET PURCHASE AGREEMENT EXHIBIT 3(C)(3) CONTINUING COLLATERAL MORTGAGE (THIS IS A FUTURE ADVANCE MORTGAGE) - -------------------------------------------------------------------------------- This Continuing Collateral Mortgage ("Mortgage") is made as of March 21, 2001 by NATURAL GAS ACQUISITION CORPORATION, a State of Colorado corporation ("Mortgagor"), located at 2911 SCR 1260, Midland, Texas 79706 to GREAT LAKES COMPRESSION, INC., a State of Michigan corporation ("Mortgagee"), located at 16945 Northchase Drive, Suite 1750, Houston, Texas 77060. As security for the purposes stated in this Mortgage, Mortgagor mortgages, warrants, and assigns to Mortgagee, its successors and assigns, the real property in the County of Montmorency, State of Michigan, legally described as: Commencing at the Northeast comer of Section 22, Town 29 North, Range 1 East, thence S0(degrees)04'30"E 1571.8 feet on section line to the point of beginning, thence S89(degrees)00'10"W 660.0 feet; thence S0(degrees)04'30"E 330.0 feet thence N89(degrees)00'10"E 660.0 feet; thence N0(degrees)04'30"W 330.0 feet on section line to the point of beginning. Part of the Southeast 1/4 of the Northeast 1/4 of Section 22, T29N, R1E, containing 5 acres more or less, except oil, gas, coal and mineral rights as reserved by a prior owner by instrument at Liber 371, Page 143. Township of Albert (West Part), County of Montmorency, and State of Michigan; and subject to easements and restrictions of record and the rights of the public and of any governmental unit in any part taken, used or deeded for street, road or highway purposes; together with: (a) all related easements, hereditaments, appurtenances, rights, licenses and privileges; (b) all buildings and improvements now or later situated under, upon or over any of the above described land; (c) all the rents, issues, profits, revenues, accounts and general intangibles arising from the above described land, or relating to any business conducted by Mortgagor on it, under present or future leases, licenses or otherwise, including, without limit, all rights conferred by Act No. 210 of the Michigan Public Acts of 1953, as amended; (d) all machinery, equipment, goods, fixtures, and articles of personal property of every kind and nature (other than Household Goods, as defined by 12 CFR 227.12, as amended from time to time, unless such goods were purchased with the proceeds of any loan secured by this Mortgage), now or later located upon the above described land and useable in connection with any present or future operation on the land (individually and collectively the "equipment") including, without limit, all lighting, heating, cooling, ventilating, air-conditioning, incinerating, refrigerating, plumbing, sprinkling, communicating and electrical systems (it is agreed that all equipment shall for the purposes of this Mortgage, unless Mortgagee shall otherwise elect, be deemed conclusively to be real estate and mortgaged under this Mortgage); and (e) all awards or payments, and interest on them, made with respect to the Premises as a result of (i) any eminent domain proceeding, (ii) any street grade alteration, (iii) any loss of or damage to any building or other improvement, (iv) any other injury to or decrease in the value o the Premises, (v) any refund due on account of the payment of real estate taxes, assessments or other charges levied against the Premises or (vi) any refund of utility deposits or right to any tenant deposit (all of the above individually arid collectively the "Premises"). Unless otherwise, indicated, a reference to the "Premises" means all and/or any part of the Premises. This Mortgage is made to secure when due, whether by stated maturity, demand, acceleration or otherwise, all existing and future indebtedness("Indebtedness") to Mortgagee of Mortgagor, including without limit payment of the Deferred Purchase Price according to the terms of that certain Asset Purchase Agreement ("Asset Purchase Agreement") between Mortgagor and Mortgagee of even date herewith and pursuant to which this Mortgage is executed. The term "Deferred Purchase Price" shall have the same meaning when used in this Mortgage as it has in the Asset Purchase Agreement. Indebtedness includes, without limit, any and all obligations or liabilities of whatever amount of Mortgagor to Mortgagee, whether absolute or contingent, direct or indirect, voluntary or involuntary, liquidated or unliquidated, joint or several, known or unknown; any and all indebtedness, obligations or liabilities or which Mortgagor would otherwise be liable to Mortgagee were it not for the invalidity, irregularity or unenforceability of them by reason of any bankruptcy, insolvency or other law or order of any kind, or for any other reason; any and all amendments, modifications, renewals and/or extensions of any of the above; all costs incurred by Mortgagee in establishing, determining, continuing, or defending the validity or priority of its lien or security interest, or to protect the value of the Premises, or for any appraisal, environmental audit, title examination or title insurance policy relating to the Premises, or in pursuing its rights and remedies under this Mortgage or under any other agreement between Mortgagee and Mortgagor; all costs incurred by Mortgagee in connection with any suit or claim involving or against Mortgagee in any way related to the Premises, the Indebtedness or this Mortgage; and all costs of collecting Indebtedness; all of the above costs including, without limit, attorney fees incurred by Mortgagee. Mortgagor agrees to pay Mortgagee, upon demand, all costs incurred by Mortgagee which are indebtedness, and until paid all costs shall bear interest from the time incurred at the highest per annum rate applicable to any of the indebtedness, but not in excess of the maximum rate permitted bylaw. Any reference in this Mortgage to attorney fees shall be deemed a reference to all reasonable fees, charges, costs and expenses of both in-house and outside counsel and paralegals, whether or not a suit or action is instituted, and to court costs if a suit or action is instituted, and whether attorney fees or court costs are incurred at the trial court level, on appeal, in a bankruptcy, administrative or probate proceeding or otherwise. Notwithstanding the foregoing, this Mortgage shall not secure that part of the indebtedness, if any which constitutes a consumer loan, other than a consumer loan made at the same time as this Mortgage and specifically referenced as being secured by this Mortgage (and all extensions, renewals, modifications or replacements thereof). 2 Mortgagor, on a continuing basis, warrants, covenants and agrees to and with Mortgagee, which covenants, warranties and agreements, to the extent permitted by law, shall be deemed to run with the land, as follows: 1. Mortgagor will pay to Mortgagee all Indebtedness according to the terms of the relevant instruments evidencing it, and Mortgagor agrees that this Mortgage is a continuing mortgage securing the payment of the Indebtedness. 2. Mortgagor does not warrant title to the Premises, except as against claims by all persons claiming by, through or under Mortgagor. Mortgagee shall have the right, at its option and at such times as it, in its sole discretion deems necessary to take to take whatever action it may deem necessary to defend or uphold the lien of this Mortgage or otherwise enforce any of its rights under this Mortgage or any obligation secured by this Mortgage including, without limit, the right to institute appropriate legal proceedings for these purposes. With respect to the right, title, or lien of any person or entity which is superior to the lien of this Mortgage, Mortgagee has the right, but not the obligation, to acquire and/or pay oh me holder of such right, title, or lien and add the amount so paid to the Indebtedness. 3. Mortgagor shall not mortgage or pledge the Premises as security for any other indebtedness or obligations. Mortgagor shall pay when due, and before any interest, collection fees or penalties accrue or default occurs, all taxes, assessments, and other charges and impositions levied, assessed or existing with respect to (i) the Premises or (ii) the execution, delivery or recordation of this Mortgage or any note or other instrument evidencing or securing repayment of the Indebtedness or the interest of Mortgagee in the Premises, and will deliver to Mortgagee without demand official receipts showing these payments. If Mortgagor fails to pay these taxes, assessments, other charges or impositions when due, or if Mortgagor fails to pay all interest, collection fees and penalties accrued on them, Mortgagee, at its sole option, may (but is not obligated to) pay them and the monies paid shall be added to the Indebtedness. Mortgagor shall pay (before the same become liens or encumbrances against the Premises) any and all obligations or liabilities for repairs or improvements to the Premises or for any other goods, services, or utilities furnished to the Premises. No lien holder junior to this Mortgage may exercise any rights with respect to the Premises, and all rents and other proceeds from the Premises shall be held in trust by the junior lien holder as the property of Mortgagee, until satisfaction in full of the indebtedness. Nothing in this paragraph shall be considered a consent by Mortgagee to any lien, mortgage or encumbrance on the Premises unless set forth on attached Schedule A, if any. 4. Mortgagor shall keep the buildings and all other improvements now or later existing on the Premises constantly insured for the benefit of Mortgagee against fire and other hazards and risks, including without limit vandalism and malicious mischief, as Mortgagee may require and shall further provide flood insurance (it the Premises are situated in a special flood hazard area as determined by the Director of the Federal Emergency Management Agency or other governing agency), loss of rents insurance, public liability and product liability insurance and any other insurance as mortgagee may require from time to time, all in amounts and in forms and with companies as are satisfactory to Mortgagee. Mortgagor shall deliver to Mortgagee the policies evidencing the required insurance with premiums fully paid for one year in advance and with standard mortgagee clauses satisfactory to Mortgagee. Renewals of the required insurance 3 (together with evidence of premium prepayment for one year in advance) shall be delivered to Mortgagee at least thirty (30)days before the expiration of any existing policies. All policies and renewals shall provide that they may not be canceled or amended without giving Mortgagee thirty (30)days prior written notice of cancellation or amendment. All policies and renewals shall be held by, and are pledged to, Mortgagee, along with all insurance premium rebates, as additional security for the Indebtedness. Should Mortgagor fail to insure or fail to pay the premiums on any required insurance or fail to deliver the policies or renewals of them as provided above, Mortgagee may (but is not obligated to) have the insurance issued or renewed (and pay the premiums on it for the account of Mortgagor) in amounts and with companies and at premiums as Mortgagee deems appropriate. If Mortgagee elects to have insurance issued or renewed to insure Mortgagee's interest, Mortgagee shall have no obligation to also insure Mortgagor's interest or to notify Mortgagor of Mortgagee's actions. Any sums paid by Mortgagee for insurance as provided above shall be added to the Indebtedness. In the event of loss or damage, the proceeds of all required insurance shall be paid to Mortgagee alone. No loss or damage shall itself reduce the Indebtedness. Mortgagee and any of Mortgagee's employees is each irrevocably appointed attorney-in-fact for Mortgagor and is authorized to adjust and compromise each loss without the consent of Mortgagor, to collect, receive and receipt for the insurance proceeds in the name of Mortgagee and Mortgagor and to endorse Mortgagors name upon any check in payment of the loss. The proceeds shall be applied first toward reimbursement of all costs and expenses of Mortgagee in collecting the proceeds (including, without limit, attorneys' fees), and then toward payment of the Indebtedness or any portion of it, whether or not then due or payable and in whatever order of maturity as Mortgagee may elect, or Mortgagee, at its option, may apply any or all the insurance proceeds to the repair or rebuilding of the Premises. Application of proceeds by Mortgagee toward later maturing installments of the Indebtedness shall not excuse Mortgagor from making the regularly scheduled installment payments nor shall such application extend the due date or reduce the amount of any of these payments. Application of proceeds by Mortgagee toward payment of the Indebtedness shall constitute an acceleration and prepayment and shall subject Mortgagor to any applicable prepayment premium or formula. In the event of a foreclosure of this Mortgage, or the giving of a deed in lieu of foreclosure, the purchaser or grantee of the Premises shall succeed to all of the rights of Mortgagor under said insurance policies. Mortgagor shall promptly repair, replace or rebuild each part of the Premises which may be damaged or destroyed by fire or other casualty or which may be affected by any eminent domain proceedings, notwithstanding application by Mortgagee of the insurance proceeds or eminent domain award to payment of the Indebtedness. 5. Mortgagor shall abstain from commission of waste upon the Premises, keep the Premises in good repair, and promptly comply with all laws, regulations and requirements of all governmental bodies affecting the remises. If any action is threatened or commenced which affects Mortgagee's interest in the Premises, including, without limit, building, environmental or zoning proceedings, Mortgagee may take such action as it deems necessary to protect its interest and its costs shall be added to the Indebtedness. 6. In the event the Premises is taken under power of eminent domain, or by condemnation, the entire proceeds of the award shall be paid directly to Mortgagee and applied toward reimbursement of all Mortgagee's costs and expenses incurred in connection with collecting the award (including, without limit, attorney fees), and the balance applied upon the Indebtedness whether or not then due or payable in whatever manner Mortgagee deems 4 advisable. Application by Mortgagee of any condemnation award or portion of it toward the last maturing installments of the Indebtedness shall not excuse Mortgagor from making the regularly scheduled payments nor extend the due date or reduce the amount of these payments. Application of any condemnation award by Mortgagee toward payment of the Indebtedness shall constitute an acceleration and a prepayment and shall subject Mortgagor to any applicable prepayment premium or formula. Mortgagee or any of Mortgagee's employees is irrevocably appointed attorney-in-fact and is duly authorized and empowered to receive, receipt for, discharge and satisfy any condemnation award and judgment, whether joint or several, on behalf of Mortgagor. Mortgagee shall not be liable for failure to collect any condemnation award, regardless of the cause of such failure. 7. The Indebtedness shall become due and payable immediately, without notice, at the option of Mortgagee, if Mortgagor shall convey, assign or transfer the Premises by deed, land contractor other instrument, or if title to the Premises shall become vested in any other person or party in any manner whatsoever or if there is any disposition (through one or more transactions) of legal or beneficial title to a controlling interest of Mortgagor. In the event ownership of the Premises becomes vested in a person or persons other than Mortgagor (with or without the prior written approval of Mortgagee), Mortgagee may (but shall not be obligated to) deal with and may enter into any contract or agreement with the successor(s) in interest with reference to this Mortgage in the same manner as with Mortgagor, without in any manner discharging or otherwise affecting the lien of this Mortgage or Mortgagors liability under this Mortgage or upon the Indebtedness. 8. This Mortgage shall, as to any personal property covered by it, be deemed to grant a security interest in the personal property pursuant to the Uniform Commercial Code. Mortgagor agrees, upon request of Mortgagee from time to time, to promptly furnish a list of personal property subject to this Mortgage and, upon request by Mortgagee, to immediately execute, deliver and/or file any mortgage, security agreement or financing statement to include specifically this list of personal property. Upon the occurrence of any Event of Default under this Mortgage, Mortgagee shall have all of the rights and remedies of a secured party under the Uniform Commercial Code or otherwise provided by law or by this Mortgage including, without limit, the right to require Mortgagor to assemble the personal property and make it available to Mortgagee at a place to be designated by Mortgagee which is reasonably convenient to both parties, the right to take possession of me personal property with or without demand and with or without process of law and the right to sell and dispose of it and distribute the proceeds according to law. Mortgagor agrees that any requirement of reasonable notice shall be met if Mortgagee sends notice to Mortgagor at least five (5) days prior to the date of sale, disposition or other event giving rise to the required notice. Mortgagor agrees that the proceeds of any disposition of the personal property may be applied by Mortgagee first to Mortgagee's reasonable expenses in connection with the disposition including, without limit, attorney fees, and then to payment of the Indebtedness. 9. As additional security for the payment and performance of the Indebtedness, Mortgagor assigns to Mortgagee all its right, title and interest in all written and oral leases and occupancy agreements, now or later existing, covering the Premises (but without an assumption by Mortgagee of liabilities of Mortgagor under any of these leases or occupancy agreements by virtue of this assignment), and Mortgagor assigns to Mortgagee the rents, issues and profits of 5 the Premises. If an Event of Default occurs under this Mortgage, Mortgagee may receive and collect the rents, issues and profits personally or through a receiver so long as the Event of Default exists and during the pendency of any foreclosure proceedings and during any redemption period. Mortgagor agrees to consent to the appointment of a receiver if this is believed necessary or desirable by Mortgagee to enforce its rights under this Mortgage. Mortgagee shall at no time have any obligation to attempt to collect rent or other amounts from any tenant or occupier of the Premises. Mortgagee shall at no time have any obligation to enforce any other obligations owed by tenants or occupiers of the Premises to Mortgagor. No action taken by Mortgagee under this Mortgage shall make Mortgagee a "mortgagee in possession." Mortgagor shall at no time collect advance rent under any lease or occupancy agreement pertaining to the Premises in excess of one month (other than as a security deposit) and Mortgagee shall not be bound in any respect by any rent prepayment in violation of this prohibition. The assignment of licenses and permits under this Mortgage shall not be construed as a consent by Mortgagee to any license or permit so assigned, or to impose upon Mortgagee any obligations with respect to them. Mortgagor shall not cancel or amend any of the licenses and permits assigned (nor permit any of them to terminate if they are necessary or desirable for the operation of the Premises) without first obtaining the written approval of Mortgagee. This paragraph shall not be applicable to any license or permit that terminates if it is assigned without the consent of another party (other than Mortgagor), unless this consent has been obtained nor shall this paragraph be construed as a present assignment of any license or permit that Mortgagor is required by law to hold. Mortgagor shall comply with and perform as required all obligations and restrictions imposed upon Mortgagor or the Premises under applicable deed restrictions, restrictive covenants, easements, leases, land contracts, condominium or planned unit development documents, or other agreements affecting the Premises, but this is not a consent by Mortgagee to take subject to any of these agreements unless specifically set forth on attached Schedule A, if any, and Mortgagee does not assume any obligations under these agreements. Mortgagor shall promptly provide Mortgagee with certificates of occupancy, licenses, rent rolls, income and expense statements and other documents and information pertaining to the Premises and its operations as Mortgagee, from time to time, may request. 10.(a) Mortgagor represents and covenants that Mortgagor has not used Hazardous Materials (as later defined) on or affecting the Premises in any manner which violates Environmental Laws (as later defined). Mortgagor covenants and agrees that neither it nor any occupant shall use, introduce or maintain Hazardous Materials on the Premises unless done in strict compliance with all Environmental Laws; (b) Mortgagor shall conduct and complete all investigations, environmental audits, studies, sampling and testing, and all remedial, removal and other actions necessary to clean up and remove all Hazardous Materials on or affecting the Premises hereafter introduced by Mortgagor or a third party, in accordance with all Environmental Laws to the satisfaction of Mortgagee, and in accordance with the orders and directives of all federal, state and local governmental authorities, and Mortgagor shall notify Mortgagee in writing prior to taking, and continually after that of the status of, all such actions. Mortgagor shall, promptly upon Mortgagee's request, provide Mortgagee with copies of the results of all such actions and all related documents and information. Any remedial, removal or other action by Mortgagor shall not be deemed a cure or waiver of any breach of this paragraph 10 due to the presence or use of Hazardous Materials hereafter introduced by Mortgagor or any third party on or affecting the Premises. Additionally, Mortgagor shall defend, indemnify and hold harmless Mortgagee, its employees, agents, shareholders, officers and 6 directors, from and against any and all claims, demands, penalties, fines, liabilities; settlements, damages, costs or expenses (including, without limit, attorney fees) of whatever kind arising out of or related to environmental degradation of the Premises after the date of this Mortgage and operations and activities of Mortgagor on the Premises that violate Environmental Laws, including, without limit, attorneys and consultants' fees (the attorneys and consultants to be selected by Mortgagee), investigation and laboratory fees and environmental studies required by Mortgagee (whether prior to foreclosure, or otherwise). Upon the request of Mortgagee, Mortgagor and any guarantor shall execute a separate indemnity consistent with this paragraph; (c) In the event this Mortgage is foreclosed or Mortgagor tenders a deed in lieu of foreclosure, Mortgagor shall deliver the Premises to Mortgagee, purchaser or grantee, as the case may be, free of Hazardous Materials placed on the Premises subsequent to the date of this Mortgage so that the condition of the Premises shall thereby not be a violation of any Environmental Laws;(d) Upon ten (10) days notice to Mortgagor (except in an emergency or where not practical under applicable law, in which case notice is waived), and without limitation of Mortgagee's other rights under this Mortgage or elsewhere, Mortgagee has the right, but not the obligation, to enter on the Premises and to take those actions as it deems appropriate to investigate or test for, clean up, remove, resolve, minimize the impact of or advise governmental agencies of the possible existence of any Hazardous Materials released on or from the Premises subsequent to the date of this Mortgage upon Mortgagee's receipt of any notice from any source asserting the existence of any Hazardous Materials released on or from the Premises subsequent to the date of this Mortgage or an Environmental Complaint pertaining to the Premises arid relating to Hazardous Materials released on or from the Premises subsequent to the date of this Mortgage which, if true, could result in an order, suit or other action against Mortgagor or any pan of me Premises which, in the sole opinion of Mortgagee, could jeopardize its security under this Mortgage. Any such actions conducted by Mortgagee shall be solely for the benefit of and to protect the interests of Mortgagee and shall not be relied upon Mortgagor or any third party for any purpose. By conducting any such actions, Mortgagee does not assume control over the environmental affairs or operations of Mortgagor nor assume any liability of Mortgagor or any third party; (e) The provisions of this paragraph 10 shall be in addition to all other obligations and liabilities Mortgagor may have to Mortgagee at common law or pursuant to any other agreement, and shall survive (i) the repayment of the Indebtedness, (ii) the satisfaction of all other obligations of Mortgagor under this Mortgage and under the other loan documents, (iii) the discharge of this Mortgage, and (iv) the foreclosure of this Mortgage or acceptance of a deed in lieu of foreclosure; and (f) For purposes of this Mortgage, (i) "Hazardous Materials" means each and all of the following: hazardous materials and/or substances as defined in any Environmental Law, asbestos, petroleum, petroleum by-products, natural gas, flammable explosives, radioactive materials, and toxic materials, and (ii) "Environmental Laws" mean any and all federal, state, local or other laws (whether under common law, by legislative action or otherwise), rules, policies, ordinances, directives, orders, statutes, or regulations an object of which is to regulate or improve health, safety, or the environment. 11. Upon the occurrence of any of certain events identified in Section 18 of the Asset Purchase Agreement (each an "Event of Default"), Mortgagor shall be in default under this Mortgage. 7 12. Immediately upon the occurrence of any Event of Default, Mortgagee shall have the option to do any or all of the following: (a) Declare the entire unpaid amount of the Indebtedness, including, without limit, accrued and unpaid interest on it and any applicable prepayment premium or formula, and all other charges payable by Mortgagor to Mortgagee, to be immediately due and payable and, at Mortgagee's option, (i) to bring suit for the same, or (ii) to take all steps and institute all other proceedings that Mortgagee deems necessary to enforce payment of the Indebtedness and performance under this Mortgage and to protect the lien of this Mortgage; (b) Commence foreclosure proceedings against the Premises through judicial proceedings or by advertisement, at the option of Mortgagee. The commencement by Mortgagee of foreclosure proceedings shall be deemed an exercise by Mortgagee of its option to accelerate the Indebtedness, unless such proceedings on their face specifically indicate otherwise. Mortgagor grants power to Mortgagee to sell the Premises or to cause the same to be sold at public sale, and to convey the same to the purchaser, in a single parcel or in several parcels at the option of Mortgagee; (c) Procure new or cause to be updated abstracts, tax histories, title insurance, or tide reports; (d) Obtain a receiver to manage the Premises and collect the rents, profits and income from it; (e) Contest the amount or validity of any taxes applicable to the Premises by appropriate proceedings either in Mortgagee's name, Mortgagors name or jointly with Mortgagor. Mortgagor shall execute and deliver to Mortgagee, upon demand, whatever documents and information Mortgagee determines may be necessary or proper to so contest the taxes or to secure payment of any resulting refund. Mortgagor shall reimburse Mortgagee for all costs and expenses, including, without limit, attorney fees, incurred in connection with each tax contest proceeding. All refunds resulting from each tax contest proceeding shall belong to Mortgagee to be applied against the Indebtedness with the surplus, if any, to be paid to Mortgagor. Mortgagee and any of its employees is each irrevocably appointed attorney-in-fact for Mortgagor and is authorized to execute and deliver in the name of Mortgagor those documents deemed necessary or proper by Mortgagee to carry out any tax contest proceeding or receive any resulting refunds; and/or (f) In the event of any sale of the Premises by foreclosure, through judicial proceedings, by advertisement or otherwise, apply the proceeds of any such sale in the following order or such other order as Mortgagee may elect: to (i) all expenses incurred for the collection of the Indebtedness and the foreclosure of this Mortgage including, without limit, attorney fees; (ii) all sums expended or incurred by Mortgagee directly or indirectly in carrying out terms, covenants and agreements of or under this Mortgage or any related document, together with interest as provided in this Mortgage; (iii) all accrued and unpaid interest and late payment charges upon the Indebtedness; (iv) the unpaid principal amount of the Indebtedness; and (v) the surplus, if any, paid to Mortgagor unless a court of competent jurisdiction decrees otherwise. WARNING: THIS MORTGAGE CONTAINS A POWER OF SALE AND UPON DEFAULT MAY BE FORECLOSED BY ADVERTISEMENT. IN FORECLOSURE BY ADVERTISEMENT AND THE RELATED SALE OF THE PREMISES, NO HEARING IS REQUIRED AND THE ONLY NOTICE REQUIRED IS TO PUBLISH NOTICE IN A LOCAL NEWSPAPER AND TO POST A COPY OF THE NOTICE ON THE PREMISES. MORTGAGOR WANES ALL RIGHTS UNDER THE CONSTITUTION AND LAWS OF THE UNITED STATES AND THE STATE OF MICHIGAN TO A HEARING PRIOR TO SALE IN CONNECTION WITH FORECLOSURE BY ADVERTISEMENT AND ALL NOTICE REQUIREMENTS EXCEPT AS SET FORTH 8 IN THE MICHIGAN STATUTE PROVIDING FOR FORECLOSURE BY ADVERTISEMENT. 13. No single or partial exercise, or delay in the exercise, of any right or power under this Mortgage, shall preclude other or further exercise of me rights and powers under this Mortgage. The unenforceability of any provision of this Mortgage shall not affect the enforceability of the remainder. This Mortgage constitutes the entire agreement of Mortgagor and Mortgagee with respect to the subject matter of this Mortgage. No amendment of this Mortgage shall be affective unless the same shall be in writing and signed by Mortgagor and an authorized officer of Mortgagee. This Mortgage shall be binding on Mortgagor and Mortgagee and on Mortgagors and Mortgagee's successors and assigns including, without limit, any debtor in possession or trustee in bankruptcy for Mortgagor. This shall not be deemed a consent y Mortgagee to a conveyance by Mortgagor of all or part of me Premises or of any ownership interest in Mortgagor. Mortgagee may assign the Indebtedness and any related obligations, including, without limit, this Mortgage. In the event of foreclosure of this Mortgage or the enforcement by Mortgagee of any other remedies under this Mortgage, Mortgagor waives any right otherwise available in respect to marshalling of assets which secure the Indebtedness or to require Mortgagee to pursue its remedies against any other assets or any other party. Upon full and final payment of the Indebtedness and performance by Mortgagor of all its other obligations under this Mortgage, except as otherwise provided in paragraphs 10(e)and 18, the parties shall automatically each fully and finally release and discharge the other from any claim, liability or obligation in connection with this Mortgage and the Indebtedness. This Mortgage shall in all respects be governed by and construed in accordance with the laws of the State of Michigan. 14. Promptly upon the request of Mortgagee, Mortgagor shall execute, acknowledge and deliver all further documents, and do all further acts as Mortgagee may require in its sole discretion to confirm and protect the lien of this Mortgage or otherwise to accomplish the purposes of this Mortgage. 15. Nothing in this Mortgage shall be construed to preclude Mortgagee from pursuing any available remedy provided by law for the collection of the Indebtedness or enforcement of its rights upon an Event of Default. Nothing in this mortgage shall reduce or release any rights or security interests of Mortgagee contained in any existing agreement between Mortgagor, or any guarantor and Mortgagee. No waiver of default or consent to any act by Mortgagor shall be effective unless in writing and signed by an authorized officer of Mortgagee. No waiver of any default or forbearance on the part of Mortgagee in enforcing any of its rights under this Mortgage shall operate as a waiver of any other default or of We same default on a future occasion or of any rights. 16. At the sole option of Mortgagee, this Mortgage shall become subordinate, in whole or in part (but not with respect to priority as to insurance proceeds or any eminent domain award) to any or all leases and/or occupancy agreements of the Premises upon the execution by Mortgagee, and recording in the appropriate official county records where the premises are located, of a unilateral declaration to tat effect. 9 17. All notices and demands required or permitted to be given to Mortgagor shall be deemed given when delivered to Mortgagor or when placed in an envelope addressed to Mortgagor at the address above, or at such other address as Mortgagee may have on its records' and deposited, with postage, in a depository under the custody of the United States Postal Service or delivered to an overnight delivery courier. The mailing may be certified, first class or overnight delivery mail. 18. Notwithstanding any prior revocation, termination or discharge of this Mortgage, (except as to the rights of subsequent intervening bona fide purchasers or lien holders) the effectiveness of this Mortgage shall automatically continue or be reinstated in the event that (a) any payment received or credit given by Mortgagee in respect of the Indebtedness is returned, disgorged or rescinded as a preference, impermissible setoff, fraudulent conveyance, diversion of trust funds, or otherwise under any applicable law, in which case this Mortgage shall be enforceable as if the returned, disgorged or rescinded payment or credit had not been received or given, whether or not Mortgagee relied upon this payment or credit or changed its position as a consequence of it; or (b) any liability is sought to be imposed against Mortgagee relating to any matter as to which Mortgagor agreed to indemnify Mortgagee under this Mortgage, including, without limit, as to the presence of Hazardous Materials on, in or about the Premises, whether this matter is known or unknown, now or later exists (excluding only matters which arise after any acquisition by Mortgagee of the Premises, by foreclosure, deed in lieu of foreclosure or otherwise, to the extent due to the wrongful act or omission of Mortgagee), in which case this Mortgage shall be enforceable to the extent of all liability, costs and expenses (including, without limit, attorney fees) incurred by Mortgagee as the direct or indirect result thereof. In the event of continuation or reinstatement of this Mortgage, Mortgagor agrees upon demand by Mortgagee to execute and deliver to Mortgagee those documents which Mortgagee determines are appropriate to further evidence (in the public records or otherwise) this continuation or reinstatement, although the failure of Mortgagor to do so shall not affect in any way the reinstatement or continuation. If Mortgagor does not execute and deliver to Mortgagee upon demand such documents, Mortgagee and each employee is irrevocably appointed (which appointment is coupled with an interest) the true and lawful attorney of Mortgagor (with full power of substitution) to execute and deliver such documents in the name and on behalf of Mortgagor. 10 IN WITNESS WHEREOF, Mortgagor has signed and delivered this Mortgage the day and year first written above. WITNESSES: MORTGAGOR NATURAL GAS ACQUISITION CORPORATION By: - -------------------------------- ---------------------------------- SIGNATURE OF SIGNATURE OF Its: - -------------------------------- ---------------------------------- SIGNATURE OF TITLE (if applicable) STATE OF ------------------------ COUNTY OF ----------------------- The foregoing instrument was acknowledged before me on the ____ day of ______________, 2001, by _________________________, the ________________________ of Natural Gas Acquisition corporation, a State of Colorado corporation, on behalf of the corporation. ------------------------------------------- Notary Public, County, --------- ------------ My commission expires: ---------------------- Prepared by and when recorded return to: - ---------------------------------------- NAME - ---------------------------------------- STREET ADDRESS - ---------------------------------------- city state zip code 11 ASSET PURCHASE AGREEMENT EXHIBIT 3(c)(4) STOCK PLEDGE AGREEMENT DATED AS OF MARCH 21, 2001 BY NATURAL GAS SERVICES GROUP, INC. IN FAVOR OF GREAT LAKES COMPRESSION, INC. TABLE OF CONTENTS ARTICLE I DEFINITIONS.........................................................1 SECTION 1.1 Definitions..................................................1 SECTION 1.2 UCC Terms....................................................1 ARTICLE II THE SECURITY INTERESTS.............................................1 SECTION 2.1 The Security Interests.......................................1 SECTION 2.2 Security for Deferred Purchase Obligations...................2 SECTION 2.3 Delivery of Pledged Collateral...............................2 SECTION 2.4 Termination of Security Interests; Release of Pledged Collateral................................2 SECTION 2.5 Security Interests Absolute..................................2 ARTICLE III REPRESENTATIONS AND WARRANTIES....................................3 SECTION 3.1 Corporate Existence and Power................................3 SECTION 3.2 Corporate and Governmental Authorization; Contravention......4 SECTION 3.3 Binding Effect...............................................4 SECTION 3.4 Title to Pledged Shares......................................4 SECTION 3.5 Pledge Shares................................................4 SECTION 3.6 Validity, Perfection and Priority of Security Interests......4 SECTION 3.7 Outstanding Shares...........................................4 ARTICLE IV COVENANTS..........................................................5 SECTION 4.1 Filing; Further Assurances...................................5 SECTION 4.2 Liens on Pledged Collateral..................................5 SECTION 4.3 (Intentionally Omitted)......................................5 ARTICLE V DISTRIBUTIONS ON COLLATERAL; VOTING.................................5 SECTION 5.1 No Right to Receive Distributions on Pledged Collateral; Voting...........................................5 ARTICLE VI GENERAL AUTHORITY; REMEDIES........................................6 SECTION 6.1 General Authority............................................6 SECTION 6.2 UCC Rights...................................................7 SECTION 6.3 Application of Cash; Sale of Pledged Collateral..............7 SECTION 6.4 Rights of Purchasers.........................................8 SECTION 6.5 Securities Act, etc..........................................8 SECTION 6.6 Other Rights of the Pledgee.................................10 SECTION 6.7 Waiver and Estoppel.........................................11 SECTION 6.8 Application of Moneys.......................................11
i ARTICLE VII MISCELLANEOUS....................................................12 SECTION 7.1 Notices.....................................................12 SECTION 7.2 Waivers, Non-Exclusive Remedies.............................12 SECTION 7.3 Expenses; Documentary Taxes.................................12 SECTION 7.4 Successors and Assigns......................................12 SECTION 7.5 Amendments and Waivers......................................13 SECTION 7.6 Delivery and Michigan Law...................................13 SECTION 7.7 Limitation by Law; Severability.............................13 SECTION 7.8 Counterparts; Effectiveness.................................13
ii STOCK PLEDGE AGREEMENT THIS AGREEMENT (as amended, supplemented or modified from time to time, this "Pledge Agreement") is dated as of March 21, 2001 and is by NATURAL GAS SERVICES GROUP, INC., a Colorado corporation (the "Pledgor"), in favor of GREAT LAKES COMPRESSION, INC.(the "Pledgee"). Natural Gas Acquisition Corporation, a Colorado corporation (the "Buyer"), proposes to enter into an Asset Purchase Agreement dated as of the date hereof with the Pledgee (as the same may be amended from time to time and including any agreement extending the maturity of, refinancing or otherwise restructuring all or any portion of the obligations under such Agreement or any successor agreement, the "Asset Purchase Agreement"). In order to induce the Pledgee to enter into the Asset Purchase Agreement, the Pledgor will guaranty the obligations of the Buyer to the Pledgee under and pursuant to a Guaranty dated as the date hereof by the Pledgor in favor of the Pledgee (as amended, modified or supplemented from time to time, the "Guaranty"). To provide collateral security for its guaranty, the Pledgor desires to enter into this Pledge Agreement. Accordingly, the parties hereto agree as follows: ARTICLE I DEFINITIONS SECTION 1.1 Definitions Terms defined in the Asset Purchase Agreement and not otherwise defined herein shall have, as used herein, the respective meanings provided for therein. SECTION 1.2 UCC Terms Unless otherwise defined herein, or unless the context otherwise requires, all terms used herein which are defined in the Michigan Uniform Commercial Code shall have the meanings therein stated. ARTICLE II THE SECURITY INTERESTS SECTION 2.1 The Security Interests The Pledgor hereby pledges to the Pledgee, and grants to the Pledgee a security interest in, the following (the "Pledged Collateral"): (a) the shares of stock described on Schedule I hereto (the "Pledged Shares"), and all dividends, distributions, cash, instruments and other property and proceeds from time to time received, receivable or otherwise made upon or distributed in respect of or in exchange for any or all of the Pledged Shares; and (b) all additional shares of stock of any issuer of the Pledged Shares from time to time acquired by the Pledgor in any manner, and the certificates representing such additional 1 shares, and all dividends, distributions, cash, instruments and other property from time to time received, receivable or otherwise made upon or distributed in respect of or in exchange for any or all of such shares. SECTION 2.2 Security for Deferred Purchase Obligations This Pledge Agreement secures the payment of the Deferred Purchase Price, interest thereon and other amounts now or hereafter payable by the Buyer to the Pledgee under the Asset Purchase Agreement, (i) all other obligations or liabilities now or hereafter payable by the Buyer pursuant to the Asset Purchase Agreement, and (ii) all obligations and liabilities now or hereafter payable by the Buyer under, arising out of or in connection with the Collateral Documents (all such indebtedness, obligations and liabilities being herein called the "Deferred Purchase Obligations"). The security interests granted by this Pledge Agreement are granted as security only and shall not subject the Pledgee to, or transferor in any way affect or modify, any obligation or liability of the Pledgor with respect to any of the Pledged Collateral or any transaction in connection therewith. SECTION 2.3 Delivery of Pledged Collateral All certificates or instruments representing or evidencing the Pledged Collateral shall be delivered to and held by or on behalf of the Pledgee pursuant hereto and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, with signatures appropriately guaranteed, and accompanied in each case by any required transfer tax stamps, all in form and substance satisfactory to the Pledgee. The Pledgee shall have the right, at any time in its discretion and without notice to the Pledgor, to cause any or all of the Pledged Shares or other Pledged Collateral to be transferred of record into the name of the Pledgee or its nominee. SECTION 2.4 Termination of Security Interests; Release of Pledged Collateral Upon the full, final and irrevocable payment and performance of all the Deferred Purchase Obligations, the security interests in the Pledged Collateral shall terminate and all rights to the Pledged Collateral shall revert to the Pledgor. In addition, at any time and from time to time prior to such termination of the security interests, the Pledgee may release any of the Pledged Collateral. Upon any such termination of the security interests or any release of the Pledged Collateral, the Pledgee will, at the Pledgor's expense, execute and deliver to the Pledgor such documents as the Pledgor shall reasonably request to evidence the termination of the Security Interests or the release of the Pledged Collateral. Any such documents shall be without recourse to or warranty by the Pledgee. SECTION 2.5 Security Interests Absolute All rights of the Pledgee and the security interests hereunder, and all obligations of the Pledgor hereunder, shall be absolute and unconditional and, without limiting the generality of the foregoing, shall not be released, discharged or otherwise affected by: 2 (a) any extension, renewal, settlement, compromise, waiver or release in respect of any Deferred Purchase Obligation, or any document evidencing or securing such Deferred Purchase Obligation, by operation of law or otherwise; (b) any modification or amendment or supplement to the Asset Purchase Agreement or any other document evidencing or securing any Deferred Purchase Obligation; (c) any release, non-perfection or invalidity of any direct or indirect security for any Deferred Purchase Obligation; (d) any change in the existence, structure or ownership of the Pledgor, or any insolvency, bankruptcy, reorganization or other similar proceeding affecting the Buyer or its assets or any resulting disallowance, release or discharge of all or any portion of the Deferred Purchase Obligations; (e) the existence of any claim, set-off or other right which the Pledgor may have at any time against the Buyer, the Pledgee or any other corporation or person, whether in connection herewith or any unrelated transactions; provided, that nothing herein shall prevent the assertion of any such claim by separate suit or compulsory counterclaim; (f) any invalidity or unenforceability relating to or against the Buyer for any reason of any Deferred Purchase Obligation, or any provision of applicable law or regulation purporting to prohibit the payment by the Buyer of the Deferred Purchase Obligations; (g) any failure by the Pledgee (a) to file or enforce a claim against the Buyer or its estate (in a bankruptcy or other proceeding), (b) to give notice of the existence, creation or incurring by the Buyer of any new or additional indebtedness or obligation under or with respect to the Deferred Purchase Obligations, (c) to commence any action against the Buyer, (d) to disclose to the Pledgor any facts which the Pledgee may now or hereafter know with regard to the Buyer or (e) to proceed with due diligence in the collection, protection or realization upon any collateral securing the Deferred Purchase Obligations; or (h) any other act or omission to actor delay of any kind by the Buyer or the Pledgee or any other corporation or person or any other circumstance whatsoever which might, but for the provisions of this clause, constitute a legal or equitable discharge of the Pledgor's obligations hereunder. ARTICLE III REPRESENTATIONS AND WARRANTIES The Pledgor represents and warrants as follows: SECTION 3.1 Corporate Existence and Power The Pledgor is a corporation duly incorporated, validly existing and in good standing under the laws of Colorado, and has all corporate powers and material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. 3 SECTION 3.2 Corporate and Governmental Authorization; Contravention The execution, delivery and performance by the Pledgor of this Pledge Agreement are within its corporate power, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental body, agency or official and do not contravene, or constitute (with or without the giving of notice or lapse of time or both) a default under, any provision of applicable law or of the articles of incorporation or by-laws of the Pledgor or of any agreement, judgment, injunction, order, decree or other instrument binding upon or affecting the Pledgor or result in the creation or imposition of any Lien (other than the Lien of this Pledge Agreement) upon any of its assets. SECTION 3.3 Binding Effect This Pledge Agreement constitutes a valid and binding agreement of the Pledgor, enforceable against the Pledgor in accordance with its terms, except as (i) the enforceability hereof may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and by equitable principles of general applicability (regardless of whether such enforceability is considered in a proceeding in equity or at law). SECTION 3.4 Title to Pledged Shares The Pledgor owns all of the Pledged Shares free and clear of any Liens other than the security interests granted hereby. SECTION 3.5 Pledge Shares All Pledged Shares have been duly authorized and validly issued, and are fully paid and non-assessable, and are subject to no options to purchase or similar rights of any Person. The Pledgor is not and will not become a party to or otherwise bound by any agreement, other than this Pledge Agreement, which restricts in any manner the rights of any present or future holder of any of the Pledged Shares with respect thereto. SECTION 3.6 Validity, Perfection and Priority of Security Interests Upon delivery of all certificates or instruments representing or evidencing the Pledged Securities to the Pledgee, the Pledgee will have a valid and perfected security interest in the Pledged Collateral subject to no prior Lien. No registration, recordation or filing with any governmental body, agency or official is required in connection with the execution or delivery of this Pledge Agreement, or necessary for the validity or enforceability hereof or for the perfection of the security interests of the Pledgee and the Pledgee granted hereby. The Pledgor has not performed any acts which might prevent the Pledgee from enforcing any of the terms and conditions of this Pledge Agreement or which would limit the Pledgee in any such enforcement. SECTION 3.7 Outstanding Shares The Pledged Shares constitute 100% of the issued and outstanding shares of capital stock of the Buyer. 4 ARTICLE IV COVENANTS The Pledgor agrees that so long as any Deferred Purchase Obligation remains unpaid: SECTION 4.1 Filing; Further Assurances The Pledgor will, at its expense and in such manner and form as the Pledgee may require, execute, deliver, file and record any financing statement, specific assignment or other paper and take any other action that may be necessary or desirable, or that the Pledgee may request, in order to create, preserve, perfect or validate the security interests granted hereby or to enable the Pledgee to exercise and enforce its rights hereunder with respect to any of the Pledged Collateral. To the extent permitted by applicable law, the Pledgor hereby authorizes the Pledgee to execute and file, in the name of the Pledgor or otherwise, Uniform Commercial Code financing statements which the Pledgee in its sole discretion may deem necessary or appropriate to further perfect the security interests. SECTION 4.2 Liens on Pledged Collateral The Pledgor will not sell or otherwise dispose of, or grant any option with respect to, any of the Pledged Collateral or create or suffer to exist any Lien (other than security interests in favor of the Pledgee and the Pledgee) on any Pledged Collateral. The Pledgor agrees that it will cause each issuer of the Pledged Shares not to issue any stock or other securities in addition to or in substitution for the Pledged Shares issued by such issuer, except to the Pledgor, and the Pledgor will pledge hereunder, immediately upon its acquisition (directly or indirectly) thereof, any and all additional shares of stock or other securities of each issuer of the Pledged Shares. SECTION 4.3 (Intentionally Omitted) ARTICLE V DISTRIBUTIONS ON COLLATERAL; VOTING SECTION 5.1 No Right to Receive Distributions on Pledged Collateral; Voting (a) So long as no Event of Default shall have occurred and be continuing: i. The Pledgor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Pledged Collateral or any part thereof for any purpose not inconsistent with the terms of this Pledge Agreement or the Asset Purchase Agreement; provided, however, that the Pledgor shall not exercise or refrain from exercising any such right if, in the Pledgee's judgment, such action would have a material adverse effect on the value of the Pledged Collateral or any part thereof, and, provided, further, that the Pledgor shall give the Pledgee at least five days' written notice of the manner in which it intends to exercise, or the reasons for refraining from exercising, any such right. 5 ii. The Pledgor shall not be entitled to receive and retain any dividends, interest and other payments and distributions made upon or with respect to the Pledged Collateral, and any such dividends, interest and other payments and distributions shall be, and shall be forthwith delivered to the Pledgee to hold as, Pledged Collateral and shall, if received by the Pledgor, be received in trust for the benefit of the Pledgee, be segregated from the other property or funds of the Pledgor and be forthwith delivered to the Pledgee as Pledged Collateral in the same form as so received (with any necessary endorsement). iii. The Pledgee shall execute and deliver (or cause to be executed and delivered) to the Pledgor all such proxies, powers of attorney, consents, ratifications and waivers and other instruments as the Pledgor may reasonably request for the purpose of enabling the Pledgor to exercise the voting and other rights which it is entitled to exercise pursuant to paragraph (i) above. (b) Upon the occurrence and during the continuance of an Event of Default: i. All rights of the Pledgor to exercise the voting and other consensual rights which it would otherwise be entitled to exercise pursuant to Section 6(a)(i) and to receive the dividends and interest payments which it would otherwise be authorized to receive and retain pursuant to Section 6(a)(ii) shall cease, and all such rights shall thereupon become vested in the Pledgee who shall thereupon have the sole right to exercise such voting and other consensual rights and to receive and hold as Pledged Collateral such dividends and interest payments. ii. All dividends and interest payments which are received by the Pledgor contrary to the provisions of paragraph (i) of this Section 6(b) shall be received in trust for the benefit of the Pledgee, shall be segregated from other funds of the Pledgor and shall be forthwith paid over to the Pledgee as Pledged Collateral in the same form as so received (with any necessary endorsement). ARTICLE VI GENERAL AUTHORITY; REMEDIES SECTION 6.1 General Authority The Pledgor hereby irrevocably appoints the Pledgee and any officer or Pledgee thereof, with full power of substitution, as its true and lawful attorney-in-fact, in the name of the Pledgor or its own name, for the sole use and benefit of the Pledgee, but at the Pledgor's expense, at any time and from time to time, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to carry out the terms of this 6 Pledge Agreement and, without limiting the foregoing, the Pledgor hereby gives the Pledgee the power and right on its behalf, without notice to or further assent by the Pledgor to do the following: (a) to receive, take, endorse, assign and deliver any and all checks, notes, drafts, acceptances, documents and other negotiable and non-negotiable instruments taken or received by the Pledgor as, or in connection with, the Pledged Collateral; (b) to demand, sue for, collect, receive and give acquittance for any and all monies due or to become due upon or in connection with the Pledged Collateral; (c) to commence, settle, compromise, compound, prosecute, defend or adjust any claim, suit, action or proceeding with respect to, or in connection with, the Pledged Collateral; (d) to sell, transfer, assign or otherwise deal in or with the Pledged Collateral or any part thereof, as fully and effectually as if the Pledgee and the Pledgee were the absolute owners thereof; and (e) to do, at its option, but at the expense of the Pledgor, at any time or from time to time, all acts and things which the Pledgee deems necessary to protect or preserve the Pledged Collateral and to realize upon the Pledged Collateral. SECTION 6.2 UCC Rights If an Event of Default shall have occurred, the Pledgee may in addition to all other rights and remedies granted to it in this Pledge Agreement and in any other agreement securing, evidencing or relating to the Deferred Purchase Obligations, exercise (i) all rights and remedies of a secured party under the Uniform Commercial Code of Michigan (the "UCC")(whether or not in effect in the jurisdiction where such rights are exercised) and (ii) all other rights available to the Pledgee at law or equity. SECTION 6.3 Application of Cash; Sale of Pledged Collateral (a) The Pledgor expressly agrees that if an Event of Default shall occur and be continuing, the Pledgee, without demand of performance or other demand or notice of any kind (except the notice specified below of the time and place of any public or private sale) to or upon the Pledgor or any other Person (all of which demands and/or notices are hereby waived by the Pledgor), may forthwith (i) apply the cash, if any, then held by it as Collateral as specified in Section 6.8 and (ii) if there shall be no such cash or if such cash shall be insufficient to pay the Deferred Purchase Obligations in full, to collect, receive, appropriate and realize upon the Pledged Collateral, and/or sell, assign, give an option or options to purchase or otherwise dispose of and deliver the Pledged Collateral (or contract to do so) or any part thereof in one or more parcels (which need not be in round lots) at public or private sale, at any office of the Pledgee or elsewhere in such manner is commercially reasonable and, as the Pledgee may deem best, for cash or on creditor for future delivery without assumption of any credit risk. The Pledgee shall have the right upon any such public sale, and, if the Pledged Collateral is of a type customarily sold in a recognized market or is of a type which is the subject of widely distributed standard price quotations, upon any such private sale or sales, to purchase the whole or any part of the 7 Pledged Collateral so sold, and thereafter to hold the same, absolutely and free from any right or claim of any kind. To the extent permitted by applicable law, the Pledgor waives all claims, damages and demands against the Pledgee arising out of the foreclosure, repossession, retention or sale of the Pledged Collateral. (b) Unless the Pledged Collateral threatens to decline speedily in value or is of a type customarily sold on a recognized market, the Pledgee shall give the Pledgor five days' written notice of its intention to make any such public or private sale or sale at a broker's board or on a securities exchange. Such notice shall (i) in the case of a public sale, state the time and place fixed for such sale, (ii) in the case of sale at a broker's board or on a securities exchange, state the board or exchange at which such sale is to be made and the day on which the Pledged Collateral, or the portion thereof being sold, will first be offered for sale and (iii) in the case of a private sale, state the day after which such sale may be consummated. The Pledgee shall not be obligated to make any such sale pursuant to any such notice. The Pledgee may adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for the sale, and such sale may be made at any time or place to which the same may be so adjourned. In the case of any sale of all or any part of the Pledged Collateral on credit or for future delivery, the Pledged Collateral so sold may be retained by the Pledgee until the selling price is paid by the purchaser thereof, but the Pledgee shall not incur any liability in case of the failure of such purchaser to take up and pay for the Pledged Collateral so sold and, in the case of such failure, such Pledged Collateral may again be sold upon like notice. SECTION 6.4 Rights of Purchasers Upon any sale of the Pledged Collateral (whether public or private), the Pledgee shall have the right to deliver, assign and transfer to the purchaser thereof the Pledged Collateral so sold. Each purchaser (including the Pledgee) at any such sale shall hold the Collateral so sold absolutely, free from any claim or right of whatever kind, including any equity or right of redemption of the Pledgor who, to the extent permitted by law, hereby specifically waives all rights of redemption, including, without limitation, any right to redeem the Pledged Collateral under Section 8.9-5 06 of the UCC, and any right to a judicial or other stay or approval which it has or may have under any law now existing or hereafter adopted. SECTION 6.5 Securities Act, etc. (a) In view of the position of the Pledgor in relation to the Pledged Securities, or because of other present or future circumstances, a question may arise under the Securities Act of 1933, as now or hereafter in effect, or any similar statute hereafter enacted analogous in purpose or effect (such Act and any such similar statute as from time to time in effect being herein called the "Federal Securities Laws") with respect to any disposition of the Pledged Collateral permitted hereunder. The Pledgor understands that compliance with the Federal Securities Laws might very strictly limit the course of conduct of the Pledgee if the Pledgee were to attempt to dispose of all or any part of the Pledged Collateral, and might also limit the extent to which or the manner in which any subsequent transferee of any Pledged Collateral could dispose of the same. Similarly, there may be other legal restrictions or limitations affecting the Pledgee in any attempt to dispose of all or part of the Pledged Collateral under applicable Blue Sky or other state securities laws or similar laws analogous in purpose or effect. Under applicable law, in the 8 absence of an agreement to the contrary, the Pledgee might to be held to have certain general duties and obligations to the Pledgor to make some effort toward obtaining a fair price even though the obligations of the Pledgor may be discharged or reduced by the proceeds of a sale at a lesser price. The Pledgor clearly understands that the Pledgee is not to have any such general duty or obligation to the Pledgor, and the Pledgor will not attempt to hold the Pledgee responsible for selling or any part of the Pledged Collateral at any inadequate price even if the Pledgee shall accept the first offer received or does not approach more than one possible purchaser. Without limiting the generality of the foregoing, the provisions of this Section would apply if, for example, the Pledgee were to place all or any part of the Pledged Collateral for private placement by an investment banking firm, or if such investment banking firm purchased all or any part of the Pledged Collateral for its own account, or if the Pledgee placed all or any part of the Pledged Collateral privately with a purchaser or purchasers. Accordingly, the Pledgor expressly agrees that the Pledgee is authorized, in connection with any sale of the Pledged Collateral, if it deems it advisable so to do, (i) to restrict the prospective bidders on or purchasers of any of the Pledged Collateral to a limited number of sophisticated investors who will represent and agree that they are purchasing for their own account for investment and not with a view to the distribution or sale of any of such Pledged Collateral, (ii) to cause to be placed on certificates for any or all of me Pledged Collateral or on any other securities pledged hereunder a legend to the effect that such security has not been registered under the Federal Securities Laws and may not be disposed of in violation of the provision of said Laws and (iii) to impose such other limitations or conditions in connection with any such sale as the Pledgee deems necessary or advisable in order to comply with said Act or any other law. The Pledgor covenants and agrees that it will execute and deliver such documents and take such other action as the Pledgee deems necessary or advisable in order to comply with said Act or any other law. The Pledgor acknowledges and agrees that such limitations may result in prices and other terms less favorable to the Pledgor than if such limitations were not imposed, and, notwithstanding such limitations, agrees that any such sale shall be deemed to have been made in a commercially reasonable manner, it being the agreement of the Pledgor and the Pledgee that the provisions of this Section 6.5 will apply notwithstanding the existence of a public or private market upon which the quotations or sales prices may exceed substantially the price at which the Pledgee sells. The Pledgee shall under no obligation to delay a sale of any Pledged Collateral for a period of time necessary to permit the issuer of any securities contained therein to register such securities under the Securities Act of 1933, or under applicable state securities laws, even if the issuer would agree to it. (b) If the Pledgee shall determine to exercise its right to sell all or any of the Pledged Collateral and if in the opinion of counsel for the Pledgee it is necessary, or if in the opinion of the Pledgee it is advisable, to have the securities included in the Pledged Collateral or the portion thereof to be sold registered under the provisions of the Federal Securities Laws, the Pledgor agrees, at its own expense, (i) to execute and deliver, and to use its best efforts to cause each corporation whose securities are to be sold and their directors and officers to execute and deliver, all such instruments and documents, and to do or cause to be done all other such acts and things, as may be necessary or, in the opinion of the Pledgee, advisable to register such securities under the provisions of the Federal Securities Laws and to cause the registration statement relating thereto to become effective and to remain effective for such period as prospectuses are required bylaw to be furnished, and to make or cause to be made all amendments and supplements thereto and to the related prospectus which, in the opinion of the Pledgee, are 9 necessary or advisable, all in conformity with the requirements of the Securities Act of 1933 and the rules and regulations of the Securities and Exchange Commission thereunder, (ii) to use its best efforts to cause the corporation whose securities are to be sold to agree to prepare, and to make available to its security holders as soon as practicable, an earnings statement (which need not be audited) covering the period of at least 12 months beginning with the first month after the effective date of any such registration statement, which earning statement will satisfy the provisions of Section 11(a) of the Securities Act of 1933, (iii) to use its best efforts to qualify such securities understate Blue Sky or securities laws and to obtain the approval of any governmental authorities for the sale of such securities as requested by the Pledgee and (iv) at the request of the Pledgee, to indemnify and hold harmless the Pledgee and any underwriters (and any person controlling any of the foregoing) from and against any loss, liability, claim, damage and expense (and reasonable counsel fees incurred in connection therewith) under the Securities Act of 1933 or otherwise insofar as such loss, liability, claim, damage or expense arises out of or is based upon any untrue statement or alleged untrue statement of a material fact contained in such registration statement or prospectus or in any preliminary prospectus or any amendment or supplement thereto, or arises out of or is based upon any omission or alleged omission to state therein a material fact required to be stated or necessary to make the statements therein not misleading, such indemnification to remain operative regardless of any investigation made by or on behalf of the Pledgee or any underwriters (or any person controlling any of the foregoing); provided that the Pledgor shall not be liable in any case to the extent that any such loss, liability, claim, damage or expense arises out of or is based on an untrue statement or alleged untrue statement or an omission or an alleged omission made in reliance upon and in conformity with written information furnished to such corporation by the Pledgee or any underwriter expressly for use in such registration statement or prospectus. SECTION 6.6 Other Rights of the Pledgee (a) The Pledgee (i) shall have the right and power to institute and maintain such suits and proceedings as it may deem appropriate to protect and enforce the rights vested in it by this Pledge Agreement and (ii) may proceed by suit or suits at law or in equity to enforce such rights and to foreclose upon the Pledged Collateral and to sell all, or from time to time, any of the Pledged Collateral under the judgment or decree of a court of competent jurisdiction. (b) The Pledgee shall, to the extent permitted by applicable law, without notice to the Pledgor or any party claiming through it, without regard to the solvency or insolvency at such time of any Person then liable for the payment of any of the Deferred Purchase Obligations, without regard to the then value of the Pledged Collateral and without requiring any bond from any complainant in such proceedings, be entitled as a matter of right to the appointment of a receiver or receivers (who may be the Pledgee) of the Pledged Collateral or any part thereof, and of the profits, revenues and other income thereof, pending such proceedings, with such powers as the court making such appointment shall confer, and to the entry of an order directing that the profits, revenues and other income of the property constituting the whole or any part of the Pledged Collateral be segregated, sequestered and impounded for the benefit of the Pledgee, and the Pledgor irrevocably consents to the appointment of such receiver or receivers and to the entry of such order. 10 (c) In no event shall the Pledgee have any duty to exercise any rights or take any steps to preserve the rights of the Pledgor or the Pledgee in the Pledged Collateral, nor shall the Pledgee be liable to the Pledgor or any other Person for any loss caused by the Pledgee's failure to meet any obligation imposed by Section 9-207(e) of the UCC or any successor provision. Without limiting the foregoing, the Pledgee shall be deemed to have exercised reasonable care in the custody and preservation of the Pledged Collateral in its possession if the Pledged Collateral is accorded treatment substantially equal to that which the Pledgee accords its own property, it being understood that the Pledgee shall not have any duty or responsibility for (i) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Pledged Collateral, whether or not the Pledgee has or is deemed to have knowledge of such matters or (ii) taking any necessary steps to preserve rights against any parties with respect to any Pledged Collateral. SECTION 6.7 Waiver and Estoppel (a) The Pledgor agrees, to the extent it may lawfully do so, that it will not at any time in any manner whatsoever claim or take the benefit or advantage of, any appraisal, valuation, stay, extension, moratorium, turnover or redemption law, or any law permitting it to direct the order in which the Pledged Collateral shall be sold, now or at any time hereafter in force which may delay, prevent or otherwise affect the performance or enforcement of this Pledge Agreement, and hereby waives all benefit or advantage of all such laws. The Pledgor covenants that it will not hinder, delay or impede the execution of any power granted to the Pledgee in the Asset Purchase Agreement or this Pledge Agreement. (b) The Pledgor, to the extent it may lawfully do so, on behalf of itself and all who claim through or under it, including without limitation any and all subsequent creditors, vendees, assignees and lienors, waives and releases all rights to demand or to have any marshalling of the Pledged Collateral upon any sale, whether made under any power of sale granted herein or pursuant to judicial proceedings or under any foreclosure or any enforcement of this Pledge Agreement, and consents and agrees that all of the Pledged Collateral may at any such sale be offered and sold as an entirety. (c) The Pledgor waives, to the extent permitted by law, presentment, demand, protest and any notice of any kind (except the notices expressly required hereunder) in connection with this Pledge Agreement and any action taken by the Pledgee with respect to the Pledged Collateral. The Pledgor waives and agrees not to assert any privileges which it may acquire under Section 9-112 of the UCC. SECTION 6.8 Application of Moneys The proceeds of any sale of, or other realization upon, all or any part of the Pledged Collateral shall be applied by the Pledgee in the following order of priority (the Pledgor remaining liable for any deficiency remaining unpaid after such application): (a) to payment of the expenses of such sale or other realization, including reasonable compensation to the Pledgee, and all expenses, liabilities and advances incurred or made by the Pledgee, its agents and counsel in connection therewith or in connection with the 11 care, safekeeping or otherwise of any or all of be Pledged Collateral, and any other unreimbursed expenses for which the Pledgee is to be reimbursed pursuant to Section 7.3; (b) to the Pledgee for application by it to the payment of the Deferred Purchase Obligations in such order as the Pledgee may elect; and (c) any surplus then remaining shall be paid to the Pledgor, or its successors or assigns, or to whomsoever may be lawfully entitled to receive the same or as a court of competent jurisdiction may direct. ARTICLE VII MISCELLANEOUS SECTION 7.1 Notices All notices, requests and other communications to any party hereunder shall be in writing and shall be given to such party at its address set forth on the signature page hereof onto such other address as such party may hereafter specify for the purpose by notice to the other. Each such notice, request or other communication shall be effective (i) two days after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (ii) if given by any other means, when delivered at the address specified in this Section. Rejection or refusal to accept, or the inability to deliver because of a changed address of which no notice was given shall not affect the validity of notice given in accordance with this Section. SECTION 7.2 Waivers, Non-Exclusive Remedies No failure on the part of the Pledgee to exercise, and no delay in exercising, no course of dealing with respect to, any right under this Pledge Agreement shall operate as a waiver thereof; nor shall any single or partial exercise by the Pledgee of any right under this Pledge Agreement preclude any other or further exercise thereof or the exercise of any other right. The rights of the Pledgee under this Pledge Agreement are cumulative and are not exclusive of any other remedies provided by law. SECTION 7.3 Expenses; Documentary Taxes The Pledgor shall forthwith on demand pay all out-of-pocket expenses incurred by the Pledgee, including fees and disbursements of its counsel and Pledgees, in connection with the preparation and administration of this Pledge Agreement or the administration, sale or other disposition of the Pledged Collateral on the preservation, protection or defense of the rights of the Pledgee and the Pledgee in and to the Pledged Collateral. The Pledgor shall forthwith pay on demand the amount of any taxes which the Pledgee may have been required to pay be reason of the security interests (including any applicable transfer taxes) or to free any of the Pledged Collateral from the Lien thereof. SECTION 7.4 Successors and Assigns This Pledge Agreement is for the benefit of the Pledgee and its successors and assigns, and in the event of an assignment of all or any of the Deferred Purchase Obligations, the rights 12 hereunder, to the extent applicable to the indebtedness so assigned, may be transferred with such indebtedness. This Pledge Agreement shall be binding upon the Pledgor and its successors and assigns. SECTION 7.5 Amendments and Waivers Any provision of this Agreement may be amended or waived, if, but only if, such amendment or waiver is in writing and is signed by the Pledgor and the Pledgee. SECTION 7.6 Delivery and Michigan Law This Pledge Agreement has been delivered in Michigan and shall be governed by and construed in accordance with the laws of the State of Michigan, except as otherwise required by mandatory provisions of law and except to the extent that remedies provided by the laws of any jurisdiction other than Michigan are governed by the laws of such jurisdiction. SECTION 7.7 Limitation by Law; Severability (a) All rights, remedies and powers provided in this Pledge Agreement may be exercised only to the extent that the exercise thereof does not violate any applicable provision of law, and all the provisions of this Pledge Agreement are intended to be subject to all applicable mandatory provisions of law which may be controlling and be limited to the extent necessary so that they will not render this Pledge Agreement invalid, unenforceable in whole or in part, or not entitled to be recorded, registered or filed under the provisions of any applicable law. (b) If any provision hereof is invalid and unenforceable in any jurisdiction, then, to the fullest extent permitted by law, (i) the other provisions hereof shall remain in full force and effect in such jurisdiction and shall be liberally construed in favor of the Pledgee in order to carry out the intentions of the parties hereto as nearly as may be possible; and (ii) the invalidity or unenforceability of any provision hereof in any jurisdiction shall not affect the validity or enforceability of such provision in any other jurisdiction. SECTION 7.8 Counterparts; Effectiveness This Pledge Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Pledge Agreement shall become effective when the Pledgee shall have received counterparts hereof signed by itself and the Pledgor. 13 IN WITNESS WHEREOF, the parties hereto have caused this Pledge Agreement to be duly executed by their respective authorized officers as of the day and year first above written. NATURAL GAS SERVICES GROUP, INC., as Pledgor By: ----------------------------------- Title: ----------------------------- [Address] -------------------------- -------------------- GREAT LAKES COMPRESSION, INC., as Pledgee By: ----------------------------------- Title: ----------------------------- [Address] -------------------------- -------------------- 14 SCHEDULE I LIST OF PLEDGED SHARES
Stock Class of Stock Certificate Par Number of Issuer Stock Nos. Value Shares Natural Gas Acquisition Corporation Common 1 $ .01 10,000
FINANCING STATEMENT SCHEDULE A DEBTOR'S PROPERTY REAL ESTATE: Five acres of land in West part of Albert Township, Montmorency County, Michigan, described as follows: Commencing at the Northeast corner of Section 22, Town 29 North, Range 1 East, thence S0(degrees)04'30"E 1571.8 feet on section line to the point of beginning; thence S89 (degrees)00'10"W 660.0 feet; thence SO(degrees)04'30"E 330.0 feet; thence N89(degrees)00'10"E 660.0 feet; thence NO(degrees)04'30"W 330.0 feet on section line to the point of beginning. Part of the Southeast 1/4 of the Northeast 1/4 of Section 22, T29N, R1E, containing 5 acres more or less, except oil, gas, coal and mineral rights as reserved by a prior owner by instrument at Liber 371, Page 143 and other minerals, and subject to easement and restrictions of record and the rights of the public and of any governmental unit in any part taken, used or deeded for street, highway or road purposes. The North 30 feet is subject to a private easement. BUILDINGS AND FIXTURES: 1. A building located on the real estate described above and used for general office purposes and service repair. 2. A building located on the real estate described above and used as a fabrication facility. 3. A building located on the real estate described above and used as a storage building. FABRICATION TOOLS AND EQUIPMENT: 1. Fabrication Tools 2. Compressor Tools 3. Generator 4. Hydraulic Press 5. Hoists 6. Front End Loader 7. Forklift Schedule A - Page 1 OFFICE EQUIPMENT: 1. Phones 2. Computers and Computer Equipment 3. Radios 4. Desk and File Cabinet 5. Camera TRANSPORTATION EQUIPMENT: 1 Truck 99466 1999 Chevy GMT400 1GBJK34J4XF018466 2 Truck 9840 1998 Chevy CK3500 1GCHK34J4WE121840 3 Truck 9739 1997 Dodge Ram 3B7KF23Z9VM514639 4 Truck 0028 2000 Chevy CK3500 1GBJK34J7YF447828 5 Truck 9538 1995 Chevy CK3500 4X4 1GBJK34F9SE126138 6 Truck 9559 1995 Chevy K3500 4X4 1GBJK34FOSE127159 7 Truck 9695 1996 Ford F350 4X4 2FDKF38F2TCA15495 8 Truck 98100 1998 Chevy CK3500 1GBJK34F4 WF016100 9 Truck 9530 1995 Chevy GMT400 4X4 1GBJK34NXSE148530 10 Truck 9685 1996 Ford F350 4X4 1FDKF38F2TEA50385 11 Truck 9774 1997 Chevy CK3500 1GBJK34J4VF000174 12 Truck 9762 1997 Chevy CK1500 Ext 1GCEK19MXVE120362 13 Timberwolf Trailer 14 Fluid Trailer 15 Timberwolf Trailer 16 Antifreeze Trailer 17 Antifreeze Trailer
COMPRESSORS:
Unit # Unit Type Start-Up Date Horsepower - ------ --------- ------------- ---------- 001 G398/JGR4 3/14/96 540 002 S-VRG220/G1010 7/1/96 30 004 S-G3304/TDSH233S 10/1/96 90 006 S-VRG330/Broomwade 9/5/96 50 007 T-VRG310/G1210 7/1/96 50 008 T-VRG310/G1210 10/29196 50
Schedule A - Page 2 009 T-VRG310/G1210 11/8/96 50 010 T-VRG310/G1210 11/29/96 50 012 T-VRG310/G1210 12/11/96 50 013 T-VRG310/G1210 3/12/96 50 014 S-3.9 Cummins/G1010 9/5/97 30 015 T-G3304TAA/PDX20 8/1/96 120 019 T-VRG330/G1210 4/23/97 50 020 T-VRG330/G1210 4/23/97 50 025 T-VRG310/G1210 5/13/97 50 026 T-VRG310/G1210 5/19197 50 027 T-VRG310/G1210 6/4/97 g0 031 S-VRG176/G1010 12/16/97 30 033 S-VRG330/G1210 1/12/98 50 034 S-VRG330/G1210 11/7/97 50 037 S-VRG330/G1231 11/7/97 50 040 S-VRG330/G1231 1/12/98 50 042 S-VRG330/G1231 12/16/97 50 043 S-VRG330/G1231 1112/98 50 047 S-G333NA/G1730 6/1/97 120 048 S-G333NA/G1730 2112198 120 051 T-G3304NA/G1723 3/2/98 90 057 T-VRG330/G1231 3/23/98 50 058 T-V RG330/G1231 5/7198 50 059 T-VRG330/G1231 5/4/98 50 060 T-V RG330/G1231 7/1/98 50 062 S-VRG330/G1231 4/20/98 50 063 S-VRG330/G1231 6/19/98 50 066 S-VRG330/G1231 7/17/98 50 071 S-VRG330/PDX16 4/19/99 55 074 S-VRG330/PDX16 5/28/99 55 075 S-G3304NA/PDX20 3/1/99 90 077 S-G3306NA/PDX20 311/99 120 080 S-G333NA/PDX20 5/19/99 120 082 S-G3306TA/TDSH355S 11/3/98 165 083 S-VRG330/PDX16 6123/99 55 084 S-VRG3301PDX16 6/22/99 55
Schedule A - Page 3 085 S-V RG330/PDX16 7/29/99 55 086 S-VRG330/PDX16 7/29/99 55 098 T-VRG330/G1210 w/Pump 7/12/99 55 100 T-VRG330/G1210 w/Pump 7/14/99 55 101 S-VRG330/Frick 163S 10/5/99 55 102 T-V RG330/G1210 w/Pump 7/14/99 55 104 S-G3406TA/PDX25 10/13/98 325 105 S-G3406TA/PDX25 2/1/99 325 107 S-VRG330/G1210 w/Pump 6/30/99 55 108 S-VRG330/G1210 w/Pump 7/29/99 55 109 S-VRG330/G1210 w/Pump 8/3/99 55 110 S-VRG330/pdx16 w/Pump ll/l/99 55 111 S-VRG330/pdx16 w/Pump ll/1/99 55 112 S-VRG330/pdx16 w/Pump 11/5/99 55 113 S-VRG330/pdx16 w/Pump 2/4/00 55 114 S-VRG330/pdx16 w/Pump 11/16199 55 115 S-VRG330/pdx16 w/Pump 2/8/00 55 116 S-VRG330/pdx16 w/Pump 2/14/00 55 117 S-VRG330/pdxl6 w/Pump 3/13/00 55 118 S-VRG330/pdxl6 w/Pump 1/31/00 55 122 S-ES-3.9/G1210 w/Pump 11/2/99 35 123 S-ES-3.9/G1210 w/Pump 5/19/00 35 124 S-3306TAA/G24 LeRoi 12/1/99 165 125 S-3306TAA/G24 LeRoi 12/1/99 165 126 S-G5.9/G1210 w/Pump 9/13/99 90 133 S-VRG330/pdx16 w/Pump 3/9/00 55 135 S-VRG330/pdx16 w/Pump 4/Il/00 55 136 S-VRG330/pdx16 w/Pump 4/25/00 55 137 S-VRG330/pdx16 w/Pump 5/11/00 55 138 S-VRG330/pdx16 w/Pump 142 T-VRG330/1200 w/Pump 11/1/99 55 143 T-VRG330/1200 w/Pump 2/14/00 55 144 T-VRG330/1200 w/Pump 145 T-VRG330/1200 w/Pump 146 T-VRG330/1200 w/Pump 147 T-VRG330/1200 w/Pump
Schedule A - Page 4 148 T-VRG330/1200 w/Pump 151 S-VRG330/1200 w/Pump 5/25/00 55 153 2.3 LITER Ford w/Generator 26 155 S-3304-PPDX16 (Belt Drive) 156 S-3304-PPDX16 (Belt Drive) 157 S-3304-PPDX16 (Belt Drive) 158 S-3304-PPDX16 (Belt Drive) 159 S-8.3 Cummins PDX16 160 S-3304-PPDX 16(Belt Drive) 161 S-3304-PPDX16 (Belt Drive) 162 S-3304-PPDX16(Belt Drive) 163 S-3304-PPDX16 (Belt Drive) 164 S-3306-PDX20 166 S-398TA/JGR4-4 167 Wauk 817 Gen Set Spare Parts Inventory
LEASES OF COMPRESSORS: A. Secured Party is party to a Standard Gas Compressor Equipment Master Rental and Servicing Agreement dated September 23, 1997 with Ward Lake Energy as Lessee covering a skid mounted G398TALE/JGR-4 compressor package. The agreement provides for a sixty (60) month term commencing on the date when the equipment was ready for shipment or November 1,1996, whichever was later and provides for a monthly rental of $ 8,450. B. Secured Party is party to several verbal agreements with third parties who are not affiliated with Secured Party pursuant to which Secured Party has supplied compressor equipment to such third parties for indefinite terms in exchange for agreed upon rental rates. Secured Party's practice with regard to such verbal agreements is to remove its compressor units front such lessees' sites upon request of the lessee, pro-rating the monthly rent to the date the lessee requests that the equipment be removed. C. Leases of Compressors from CSI (stated lease term has expired, leased from month to month until terminated by Lessor or Lessee).
Unit # Unit Type ------ ---------- 127 CSI # 4319 128 CSI # 4583 129 CSI # 4584 130 CSI # 4585 131 CS1 # 4586 132 CSI # 4590 139 CSI # 4315 140 CSI # 4508
Schedule A - Page 5 SERVICE ONLY CONTRACTS RECIPROCATING COMPRESSORS DESCRIBED BELOW:
Unit Type Location - --------- -------- Cat 3516 TALE/Ariel JGK4-4 Briley 34 Cat 3516 TALE/Ariel JGK4-4 Briley 34 Cat 3512 TALE/Ariel JGH4-4 Briley 34 Cat 3512 TALE/Ariel JGH4-4 Briley 34 Cat 3516 TALE/Ariel JGK4-4 Broad Cat 3516 TALE/Ariel JGK4-4 Broad Cat 3 516 TALE/Ariel JGK4-4 Caledonia Cat 3516 TALE/Ariel JGK4-4 Caledonia Ajax DPC 800 Charlton Ajax DPC 800 Chester Cat 3516 TALE/Ariel JGK4-4 Comstock Hills Cat 3516 TALE/Ariel JGK4-4 Doctor's Club Cat 3 516 TALE/Ariel JGK4-4 Doctor's Club Wauk 7042/Worthington OF6 Gilchrist Creek Ajax DPC 280 Gilchrist Creek Cat 3516 TALE/Ariel JGK4-4 Loud 13 Cat 3516 TALE/Ariel JGK4-4 Loud 13 Cat 3516 TALE/Ariel JGK4-4 Highway 65 Cat 3516 TALE/Ariel JGK4-4 Lakes of the North Cat 379/Ariel JGR4-4 Webber Creek Superior/White 8 G 825/W66 Loud 15 Cat 3516 TALE/Ariel JGK4-4 Loud 15 Cat 3516 TALE/Ariel JGK4-4 Loud 15 Wauk817/ATIelJGM 2-1 Loud 15 Cat 3516 TALE/Ariel JGK4-4 Lost Lake Woods Ajax DPC 800 Maple Forest
Schedule A - Page 6 Cat 3516 TALE/Ariel JGK4-4 Marstrand Cat 3516 TALE/Ariel JGK4-4 North Bay Cat 3512 TALE/Ariel JGH4-4 Sage Creek Cat 3516 TALE/Ariel JGK4-4 North Hardwood Cat 3516 TALE/Ariel JGK4-4 Schmitt Creek Cat 3516 TALE/Ariel JGK4-4 Schmitt Creek Cat 3516 TALE/Ariel JGK4-4 Scott Creek Ajax DPC 360 West Albert 11 Ajax DPC 360 West Albert 11
SERVICE ONLY CONTRACTS OF ROTARY COMPRESSORS DESCRIBED BELOW:
Unit # Unit Type Current Location ------ --------- ---------------- 003 S-F1197/G1730 Joy Section 8 A4-18 005 S-G3304/TDSI1233S Mid-Charlton D2-22. A3-27 016 S-G 3306NA/TDS HI93S Joy Section 6 & 7 017 S-G3306NA/TDSH193S Hardwood Maynrich 024 S-V RG310/E12 Mid-Charlton ZeidlerB3-26 028 Electric/E12 Gilchrist A 1-2 7 032 S-V RG310/E 12 Mid-Charlton Zeidler A4-26 036 S-G3304NA/G1723 Mid-Charlton/Pipeline Booster 038 S-VRG330/G1231 Mid-Charlton Zeidler Booster 041 S-VRG330/G1231 Mid-Charlton D4-26 044 S-VRG265/G1010 Chester D4-lA 045 S-VRG265/G1010 Chester C2-36 046 S-G3306NA/G1730 Loud 13Joy Pipeline Booster 049 T-G3306NA/G1730 Doctors Club Section 33 Booster 052 S-G3304NAG1723 Webber Creek Booster 053 S-G3304NA/G1723 Chester D2-lA 054 S-G3304NA/G1723 Webber Creek C3-4 061 S-VRG330/G1231 Mid-Charlton A 1-25 064 S-VRG330/G1231 Loud 13Jov Section 7 072 S-VRG33 0/P DX 16 Chester C2-1 073 S-VRG330/PDX16 Chester A3-1,B4-1,B3-1 076 S-G3304NA/PDX20 Chester A1-1/B1-1
Schedule A - Page 7 078 S-6333 NA/PDX20 Loud 13 Joy Pipeline Booster 079 S-G333NA/PDX20 Mid-Charlton Flow Line Booster 119 S-V RG330/pdxl6 Mid-Charlton Zeidler B4-26 w/Pump 120 S-ES-3.9/G1210 w/Pump Mid-Charlton Hansen C3-26 121 S-ES-3.9/G1210 w/Pump Chester D3-1 134 S-VRG330/pdx16 Mid-Charlton Pipeline Booster w/Pump 149 S-VRG330/1200 w/Pump Mid-Charlton Stangor A2-25 150 S-VRG330/1200 w/Pump Chester A4-2 152 3304/1200w/Pump/Generator Sage Creek St. Albert 1-11 154 S-3408TAA/ Hardwood Zilka Flowline Booster 011 S-VRG220/G1010 Marstrand A2-35 021 S-VRG330/E12 Marstrand D4-27 022 S-VRG310/E12 Marstrand C3-35 023 S-VRG310/E12 Marstrand D1-27 030 S-VRG220/G1010 Marstrand D3-35 035 S-VRG330/GI210 Marstrand A3-34 039 S-VRG330/G1231 Marstrand D3-27 055 S-VRG283/G1010 Marstrand B1-34 056 S-VRG283/Gl0l0 Marstrand A3-35 065 S-VRG330/G1231 Marstrand C1-27
INTANGIBLES: 1. Use of Trade Name "Great Lakes Compression, Inc." and all variations of names using the words "Great Lakes" and/or "Compression". 2. Use of the current company logo consisting of a sketch of the State of Michigan with seagulls and the company name in a distinctive type style. Schedule A - Page 8 FINANCING STATEMENT SCHEDULE A DEBTOR'S PROPERTY REAL ESTATE: Five acres of land in West part of Albert Township, Montmorency County, Michigan, described as follows: Commencing at the Northeast corner of Section 22, Town 29 North, Range 1 East, thence S0(degrees)04'30" E 1571.8 feet on section line to the point of beginning; thence S89(degrees)00'10"W 660.0 feet; thence S0(degrees)04'30"E 330.0 feet; thence N89(degrees)00'10"E 660.0 feet; thence N0(degrees)04'30"W 330.0 feet on section line to the point of beginning. Part of the Southeast 1/4 of the Northeast 1/4 of Section 22, T29N, R1E, containing 5 acres more or less, except oil, gas, coal and mineral rights as reserved by a prior owner by instrument at Liber 371, Page 143 and other minerals, and subject to easement and restrictions of record and the rights of the public and of any governmental unit in any part taken, used or deeded for street, highway or road purposes. The North 30 feet is subject to a private easement. BUILDINGS AND FIXTURES: 1. A building located on the real estate described above and used for general office purposes and service repair. 2. A building located on the real estate described above and used as a fabrication facility. 3. A building located on the real estate described above and used as a storage building. FABRICATION TOOLS AND EQUIPMENT: 1. Fabrication Tools 2. Compressor Tools 3. Generator 4. Hydraulic Press 5. Hoists 6. Front End Loader 7. Forklift Schedule A - Page 1 OFFICE EQUIPMENT: 1. Phones 2. Computers and Computer Equipment 3. Radios 4. Desk and File Cabinet 5. Camera TRANSPORTATION EQUIPMENT: 1. Truck 99466 1999 Chevy GMT400 1GBJK34J4XF018466 2. Truck 9840 1998 Chevy CK3500 1GCHK34J4WE121840 3. Truck 9739 1997 Dodge Ram 3B7KF23Z9VM514639 4. Truck 0028 2000 Chevy CK3500 1GBJK34J7YF447828 5. Truck 9538 1995 Chevy CK3500 4X4 1GBJK34F9SE126138 6. Truck 9559 1995 Chevy K3500 4X4 1GBJK34FOSE127159 7. Truck 9695 1996 Ford F350 4X4 2FDKF38F2TCA15495 8. Truck 98100 1998 Chevy CK3500 1GBJK34F4WF016100 9. Truck 9530 1995 Chevy GMT400 4X4 1GBJK34NXSE148530 10. Truck 9685 1996 Ford F350 4X4 1FDKF38F2TEA50385 11. Truck 9774 1997 Chevy CK3500 1GBJK3414VF000174 12. Truck 9762 1997 Chevy CK1500 Ext 1GCEK19MXVE120362 13. Timberwolf Trailer 14. Fluid Trailer 15. Timberwolf Trailer 16. Antifreeze Trailer 17. Antifreeze Trailer
COMPRESSORS:
Unit # Unit Type Start-Up Date Horsepower ------ --------- ------------- ---------- 001 G398/JGR4 3/14/96 540 002 S-VRG220/G1010 7/1/96 30 004 S-G3304/TDSH233S 10/1/96 90 006 S-VRG330/Broomwade 9/5/96 50 007 T-VRG310/G1210 7/1/96 50 008 T-VRG310/G1210 10/29/96 50
Schedule A - Page 2 009 T-VRG310/G1210 11/8/96 50 010 T-VRG3101G1210 11/29/96 50 012 T-VRG310/G1210 12/11/96 50 013 T-VRG310/G1210 3/12/96 50 014 S-3.9 Cummins/G1010 9/5/97 30 015 T-G3304TAA/PDX20 8/1/96 120 019 T-VRG330/G1210 4/23/97 50 020 T-VRG330/G1210 4/23/97 50 025 T-VRG310/G1210 5/13/97 50 026 T-VRG310/G1210 5/19/97 50 027 T-VRG310/G1210 6/4/97 50 031 S-VRG176/G1010 12/16/97 30 033 S-VRG330/G1210 1/12/98 50 034 S-VRG330/G1210 11/7/97 50 037 S-VRG330/G1231 11/7/97 50 040 S-VRG330/G1231 1/12/98 50 042 S-VRG330/G1231 12/16/97 50 043 S-VRG330/G1231 1/12/98 50 047 S-G333NA/G1730 6/1/97 120 048 S-G333NA/G1730 2/12/98 120 051 T-G3304NA/G1723 3/2/98 90 057 T-VRG330131231 3/23/98 50 058 T-VRG330/G1231 517/98 50 059 T-VRG330/G1231 514/98 50 060 T-VRG330/G1231 711/98 50 062 S-VRG330/G1231 4120198 50 063 S-VRG330/G1231 6/19/98 50 066 S-VRG330/G1231 7/17/98 50 071 S-VRG330/PDX16 4/19/99 55 074 S-VRG330/PDX16 5/28/99 55 075 S-G3304NA/PDX20 3/1/99 90 077 S-G3306NA/PDX20 3/1/99 120 080 S-G333NA/PDX20 5/19/99 120 082 S-G3306TA/TDSH355S 1113/98 165 083 S-VRG330/PDX16 6/23/99 55 084 S-VRG330/PDX16 6/22/99 55
Schedule A - Page 3 085 S-VRG330/PDX16 7/29/99 55 086 S-VRG330/PDX16 7/29/99 55 098 T-VRG330/G1210 w/Pump 7112/99 55 100 T-VRG330/G1210 w/Pump 7/14/99 55 101 S-VRG330/Frick 163S 10/5/99 55 102 T-VRG330/G1210 w/Pump 7/14/99 55 104 S-G3406TA/PDX25 10/13/98 325 105 S-G3406TA/PDX25 2/1/99 325 107 S-VRG330/G1210 w/Pump 6/30/99 55 108 S-VRG330/G1210 w/Pump 7/29/99 55 109 S-VRG330/G1210 w/Pump 8/3/99 55 110 S-VRG330/pdx16 w/Pump 11/1/99 55 111 S-VRG330/pdx16 w/Pump 11/1/99 55 112 S-VRG330/pdx16 w/Pump 11/5/99 55 113 S-VRG330/pdx16 w/Pump 2/4/00 55 114 S-VRG330/pdx16 w/Pump 11/16/99 55 115 S-VRG330/pdx16 w/Pump 2/8/00 55 116 S-VRG330/pdxl6 w/Pump 2/14/00 55 117 S-VRG330/pdx16 w/Pump 3/13/00 55 118 S-VRG330/pdx16 w/Pump 1/31/00 55 122 S-ES-3.9/G1210 w/Pump 11/2/99 35 123 S-ES-3.9/G1210 w/Pump 5/19/00 35 124 S-3306TAA/G24 LeRoi 12/1/99 165 125 S-3306TAA/324 LeRoi 12/1/99 165 126 S-G5.9/G1210 w/Pump 9/13/99 90 133 S-VRG330/pdx16 w/Pump 3/9/00 55 135 S-VRG330/pdxl6 w/Pump 4/11/00 55 136 S-VRG330/pdx16 w/Pump 4/25/00 55 137 S-VRG330/pdx16 w/Pump 5/11/00 55 138 S-VRG330/pdxl6 w/Pump 142 T-VRG330/1200 w/Pump 11/1/99 55 143 T-VRG330/1200 w/Pump 2/14/00 55 144 T-VRG330/1200 w/Pump 145 T-VRG330/1200 w/Pump 146 T-VRG330/1200 w/Pump 147 T-VRG330/1200 w/Pump
Schedule A - Page 4 148 T-VRG330/1200 w/Pump 151 S-VRG330/1200 w/Pump 5/25/00 55 153 2.3 LITER Ford w/Generator 26 155 S-3304-PPECK16 (Belt Drive) 156 S-3304-PPDX16 (Belt Drive) 157 S-3304-PPDX16 (Belt Drive) 158 S-3304-PPDX16 (Belt Drive) 159 S-8.3 Cummins PDX16 160 S-3304-PPDX16 (Belt Drive) 161 S-3304-PPDXI 6(Belt Drive) 162 S-3304-PPDX16(Belt Drive) 163 S-3304-PPDX16 (Belt Drive) 164 S-3306-PDX20 166 S-398TA/JGR4-4 167 Wauk 817 Gen Set Spare Parts Inventory
LEASES OF COMPRESSORS: A. Secured Party is party to a Standard Gas Compressor equipment Master Rental and Servicing Agreement dated September 23, 1997 with Ward Lake Energy as Lessee covering a skid mounted G398TALE/JGR-4 compressor package. The agreement provides for a sixty (60) month term commencing on the date when the equipment was ready for shipment or November 1, 1996, whichever was later and provides for a monthly rental of $ 8,450. B. Secured Party is party to several verbal agreements with third parties who are not affiliated with Secured Party pursuant to which Secured Patty has supplied compressor equipment to such third parties for indefinite terms in exchange for agreed upon rental rates. Secured Party's practice with regard to such verbal agreements is to remove its compressor units from such lessees' sites upon request of the lessee, pro-rating the monthly rent to the date the lessee requests that the equipment be removed. C. Leases of Compressors from CSI (stated lease term has expired, leased from month to month until terminated by Lessor or Lessee).
Unit # Unit Type ------ ---------- 127 CSI # 4319 128 CSI # 4583 129 CSI # 4584 130 CSI # 4585 131 CSI # 4586 132 CSI # 4590 139 CSI # 4315 140 CSI # 4508
Schedule A - Page 5 SERVICE ONLY CONTRACTS RECIPROCATING COMPRESSORS DESCRIBED BELOW:
Unit Type Location --------- -------- Cat 3516 TALE/Ariel JGK4-4 Briley 34 Cat 3516 TALE/Ariel JGK4-4 Briley 34 Cat 3512 TALE/Ariel JGH4-4 Briley 34 Cat 3512 TALE/Ariel JGH4-4 Briley 34 Cat 3516 TALE/Ariel JGK4-4 Broad Cat 3516 TALE/Ariel JGK4-4 Broad Cat 3516 TALE/Ariel JGK4-4 Caledonia Cat 3516 TALE/Ariel JGK4-4 Caledonia Ajax DPC 800 Charlton Ajax DPC 800 Chester Cat 3516 TALE/Ariel JGK4-4 Comstock Hills Cat 3516 TALE/Ariel JGK4-4 Doctor's Club Cat 3516 TALFJArie1 JGK4-4 Doctor's Club Wauk 7042/Worthington OF6 Gilchrist Creek Ajax DPC 280 Gilchrist Creek Cat 3516 TALE/Ariel JGK4-4 Loud 13 Cat 3516 TALE/Ariel JGK4-4 Loud 13 Cat 3516 TALE/Ariel JGK4-4 Highway 65 Cat 3516 TALE/Ariel JGK4-4 Lakes of the North Cat 379/Ariel JGR4-4 Webber Creek Superior/White 8G825/W66 Loud 15 Cat 3516 TALE/Ariel JGK4-4 Loud 15 Cat 3516 TALE/Ariel JGK4-4 Loud 15 Wauk 817/Ariel JGM2-1 Loud 15 Cat 3516 TALE/Ariel JGK4-4 Lost Lake Woods Ajax DPC 800 Maple Forest
Schedule A - Page 6 Cat 3516 TALE/Ariel JGK4-4 Marstrand Cat 3516 TALE/Ariel JGK4-4 North Bay Cat 3512 TALE/Ariel JGH4-4 Sage Creek Cat 3516 TALE/Ariel JGK4-4 North Hardwood Cat 3516 TALE/Ariel JGK4-4 Schmitt Creek Cat 3516 TALE/Ariel JGK4-4 Schmitt Creek Cat 3516 TALE/Ariel JGK4-4 Scott Creek Ajax DPC 360 West Albert 11 Ajax DPC 360 West Albert 11
SERVICE ONLY CONTRACTS OF ROTARY COMPRESSORS DESCRIBED BELOW:
Unit # Unit Type Current Location ------ --------- ---------------- 003 S-F1197/G1730 Joy Section 8 A4-18 005 S-G3304/TDSH233S Mid-Chariton D2-22, A3-27 016 S-G3306NA/TDSH193S Joy Section 6 & 7 017 S-G3306NAITDSH193S Hardwood Maynrich 024 S-VRG310/E12 Mid-Charlton ZeidlerB3-26 028 Electric/E12 Gilchrist A1-27 032 S-VRG310/E12 Mid-Charlton Zeidler A4-26 036 S-G3304NA/G1723 Mid-Charlton/ Pipeline Booster 038 S-VRG330/G1231 Mid-Chariton Zeidler Booster 041 S-VRG330/G1231 Mid-Charlton D4-26 044 S-VRG265/G1010 Chester D4-lA 045 S-VRG265/G10IO Chester C2-36 046 S-G3306NA/G1730 Loud 13 Joy Pipeline Booster 049 T-G3306NAJG1730 Doctors Club Section 33 Booster 052 S-G3304NAG1723 Webber Creek Booster 053 S-G3304NA/G1723 Chester D2-lA 054 S-G3304NA/G1723 Webber Creek C3-4 061 S-VRG330/G1231 Mid-Chariton A 1-25 064 S-VRG330/G1231 Loud 13Joy Section 7 072 S-VRG330/PDX16 Chester C2-1 073 S-V RG330/P DX 16 Chester A 3-1.B4-1,B 3-t 076 S-G3304NA/PDX20 Chester A1-1B1-1
Schedule A - Page 7 078 S-G333NA/PDX20 Loud 13 Joy Pipeline Booster 079 S-G333NA/PDX20 Mid-Chariton Flow Line Booster 119 S-VRG330/pdx16 w/Pump Mid-Charlton ZeidlerB4-26 120 S-ES-3.9/G1210 w/Pump Mid-Charlton Hansen C3-26 121 S-ES-3.9/G1210 w/Pump Chester D3-1 134 S-VRG330/pdxl6 w/Pump Mid-Charlton Pipeline Booster 149 S-VRG330/1200 w/Pump Mid-Charlton Stangor A2-25 150 S-VRG330/1200 w/Pump Chester A4-2 152 3304/1200w/Pump/Generator Sage Creek St. Albert 1-11 154 SA408TAA/ Hardwood Zilka Flowline Booster 011 S-VRG220/G1010 Marstrand A2-35 021 S-VRG330/E12 Marstrand D4-27 022 S-VRG310/E12 Marstrand C3-35 023 S-VRG310/E12 Marstrand D1-27 030 S-VRG220/G1010 Marstrand D3-35 035 S-VRG330/G1210 Marstrand A3-34 039 S-VRG330/G1231 Marstrand D3-27 055 S-VRG283/G1010 Marstrand B1-34 056 S-VRG283/G1010 Marstrand A3-35 065 S-VRG330/G1231 Marstrand C1-27
INTANGIBLES: 1. Use of Trade Name "Great Lakes Compression, Inc." and all variations of names using the words "Great Lakes" and/or "Compression". 2. Use of the current company logo consisting of a sketch of the State of Michigan with seagulls and the company name in a distinctive type style. Schedule A - Page 8 FINANCING STATEMENT SCHEDULE A DEBTOR'S PROPERTY REAL ESTATE: z Five acres of land in West part of Albert Township, Montmorency County, Michigan, described as follows: Commencing at the Northeast corner of-Section 22, Town 29 North, Range 1 East, thence S0(degrees)04'30"E 1571.8 feet on section line to the point of beginning; thence S89 (degrees)00'10"W 660.0 feet; thence S0(degrees)04'30"E 330.0 feet; thence N89 (degrees)00'10"E 660.0 feet; thence N0 (degrees)04'30"W 330.0 feet on section line to the point of beginning. Part of the Southeast 1/4 of the Northeast 1/4 of Section 22, T29N, R1E, containing 5 acres more or less, except oil, gas, coal and mineral rights as reserved by a prior owner by instrument at Liber 371, Page 143 and other minerals, and subject to easement and restrictions of record and the rights of the public and of any governmental unit in any part taken, used or deeded for street, highway or road purposes. The North 30 feet is subject to a private easement. BUILDINGS AND FIXTURES: 1. A building located on the real estate described above and used for general office purposes and service repair. 2. A building located on the real estate described above and used as a fabrication facility. 3. A building located on the real estate described above and used as a storage building. FABRICATION TOOLS AND EQUIPMENT: 1. Fabrication Tools 2. Compressor Tools 3. Generator 4. Hydraulic Press 5. Hoists 6. Front End Loader 7. Forklift Schedule A - Page 1 OFFICE EQUIPMENT: 1. Phones 2. Computers and Computer Equipment 3. Radios 4. Desk and File Cabinet 5. Camera. TRANSPORTATION EQUIPMENT: 1. Truck 99466 1999 Chevy GMT400 lGBJK34J4XF018466 2. Truck 9840 1998 Chevy CK3500 1GCHK34J4WE121840 3. Truck 9739 1997 Dodge Ram 3B7KF23Z9VM514639 4. Truck 0028 2000 Chevy CK3500 1GBJK34J7YF447828 5. Truck 9538 1995 Chevy CK3500 4X4 1GBJK34F9SE126138 6. Truck 9559 1995 Chevy K3500 4X4 1GBJK34FOSE127159 7. Truck 9695 1996 Ford F350 4X4 2FDKF38F2TCA15495 8. Truck 98100 1998 Chevy CK3500 1GBJK34F4 WF016100 9. Truck 9530 1995 Chevy GMT400 4X4 1GBJK34NXSE148530 10. Truck 9685 1996 Ford F350 4X4 1FDKF38F2TEA50385 l1. Truck 9774 1997 Chevy CK3500 1GBJK34J4VF000174 12. Truck 9762 1997 Chevy CK1500 Ext 1GCEK19MXVE120362 13. Timberwolf Trailer 14. Fluid Trailer 15. Timberwolf Trailer 16. Antifreeze Trailer 17. Antifreeze Trailer
COMPRESSORS:
Unit # Unit Type Start-Up Date Horsepower - ------ --------- ------------- ---------- 001 6398/JGR4 3/14/96 540 002 S-VRG220/G1010 7/1/96 30 004 S-G3304lTDSH233S 1011/96 90 006 S-VRG330Broomwade 9/5/96 50 007 T-VRG310/G1210 7/1/96 50 008 T-VRG310/G1210 10/29/96 50
Schedule A - Page 2 009 T-VRG31.0/G1210 11/8/96 50 010 T-VRG310/G1210 11/29/96 50 012 T-VRG310/G1210 12/11/96 50 013 T-VRG310/G1210 3/12/96 50 014 S-3.9 Cummins/G1010 9/5/97 30 015 T-CB304TAAIPDX20 8/1/96 120 019 T-VRG330/G1210 4/23/97 50 020 T-VRG330/G1210 4123/97 50 025 T-VRG310/G1210 5113/97 50 026 T-VRG310/G1210 5/19/97 50 027 T-VRG310/G1210 6/4197. 56 031 S-VRG176/G1010 12/16/97 30 033 S-VRG330/G1210 1112/98 50 034 S-VRG330/G1210 11/7/97 50 037 S-VRG330/G1231 11/7/97 50 040 S-VRG330/G1231 1/12/98 50 042 S-VRG330/G1231 12/16/97 50 043 S-VRG330/G1231 1/12/98 50 047 S-G333NA/G1730 6/1/97 120 048 S-G333NA/G1730 2/12/98 120 051 T-G3304NA/G1723 3/2/98 90 057 T-VRG330/G1231 3/23/98 50 058 T-VRG330/G1231 5/7/98 50 059 T-VRG330/G1231 5/4198 50 060 T-VRG330/G1231 7/1/98 50 062 S-VRG330/G1231 4/20/98 50 063 S-VRG330/G1231 6/19/98 50 066 S-VRG330/G1231 7/17/98 50 071 S-VRG330/PDX16 4/19/99 55 074 S-VRG330/PDX16 5/28/99 55 075 S-G3304NA/PDX20 3/1/99 90 077 S-G3306NA/PDX20 3/1/99 120 080 S-G333NA/PDX20 5/19/99 120 082 S-G3306TAITDSH355S 11/3/98 165 083 S-VRG330IPDX16 6/23/99 55 084 S-VRG330/PDX16 6/22/99 55
Schedule A - Page 3 085 S-VRG330/PDX16 7/29/99 55 086 S-VRG330/PDX16 7/29/99 55 098 T-VRG330/G1210 w/Pump 7/12/99 55 100 T-VRG330/G1210 w/Pump 7/14/99 55 101 S-VRG330/Frick163S 10/5/99 55 102 T-VRG330/G1210 w/Pump 7/14/99 55 104 S-G3406TA/PDX25 10/13/98 325 105 S-G3406TA/PDX25 2/1/99 325 107 S-VRG330/G1210 w/Pump 6/30/99 55 108 S-VRG330/G1210 w/Pump 7/29/99 55 109 S-VRG330/G1210 w/Pump 8/3/99 55 110 S-VRG330/pdxl6 w/Pump 11/1199 55 111 S-VRG330/pdxl6 w/Pump 11/1/99 55 112 S-VRG330/pdx16 w/Pump 11/5/99 55 113 S-VRG330/pdx16 w/Pump 2/4/00 55 114 S-VRG330/pdx16 w/Pump 11/16/99 55 115 S-VRG330/pdxl6 w/Pump 2/8/00 55 116 S-VRG330/pdxl6 w/Pump 2/14/00 55 117 S-VRG330/pdx16 w/Pump 3/13/00 55 118 S-VRG330/pdx16 w/Pump 1/31/00 55 122 S-ES-3.9/G1210 w/Pump 11/2/99 35 123 S-ES-3.9/G1210 w/Pump 5/19/00 35 124 S-3306TAAIG24 LeRoi 12/1/99 165 125 S-3306TAA/G24 LeRoi 12/1/99 165 126 S-G5.9/G1210 w/Pump 9/13/99 90 133 S-VRG330/pdx16 w/Pump 3/9/00 55 135 S-VRG330/pdx16 w/Pump 4/11/00 55 136 S-VRG330/pdx16 w/Pump 4/25/00 55 137 S-VRG330/pdx16 w/Pump . 5/11/00 55 138 S-VRG330/pdxl6 w/Pump 142 T-VRG330/1200 w/Pump ll/1/99 55 143 T-VRG330/1200 w/Pump 2/14/00 55 144 T-VRG33011200 w/Pump 145 T-VRG330/1200 w/Pump 146 T-VRG330/1200 w/Pump 147 T-VRG330/1200 w/Pump
Schedule A - Page 4 148 T-VRG330/1200 w/Pump 151 S-VRG330/1200 w/Pump 5/25/00 55 153 2.3 LITER Ford w/Generator 26 155 S-3304-PPDX16 (Belt Drive) 156 S-3304-PPDX16 (Belt Drive) 157 S-3304-PPDX16 (Belt Drive) 158 S-3304-PPDX16 (Belt Drive) 159 S-8.3 Cummins PDX 16 160 S-3304-PPDX16 (Belt Drive) 161 S-3304-PPDX16 (Belt Drive) 162 S-3304-PPDX16 (Belt Drive) 163 S-3304-PPDX16(Belt Drive) 164 S-3306-PDX20 166 S-398TA/JGR4-4 167 Wauk 817 Gen Set Spare Parts Inventory
LEASES OF COMPRESSORS: A. Secured Party is party to a Standard Gas Compressor Equipmaster Rental and Servicing Agreement dated September 23, 1997 with Ward Lakegy as Lessee covering a skid mounted G398TALE/JGR-4 compressor package. The agreement provides for a sixty (60) month term commencing on the date when the equipment was ready for shipment or November 1, 1996, whichever was later and provides for a monthly rental of $ 8,450. B. Secured Party is party to several verbal agreements with third parties who are not affiliated with Secured Party pursuant to which Secured Party has supplied compressor equipment to such third parties for indefinite terms in exchange for agreed upon rental rates. Secured Party's practice with regard to such verbal agreements is to remove its compressor units from such lessees' sites upon request of the lessee, pro-rating the monthly rent to the date the lessee requests that the equipment be removed. C. Leases of Compressors from CSI (stated lease term has expired, leased from month to month until terminated by Lessor or Lessee).
Unit # Unit Type ------ ---------- 127 CSI # 4319 128 CSI # 4583 129 CSI # 4584 130 CSI # 4585 131 CSI # 4586 132 CSI # 4590 139 CSI # 4315 140 CSI # 4508
Schedule A - Page 5 SERVICE ONLY CONTRACTS RECIPROCATING COMPRESSORS DESCRIBED BELOW:
Unit Type Location --------- -------- Cat 3516 TALE/Ariel JGK4-4 Briley 34 Cat 3516 TALE/Ariel JGK4-4 Briley 34 Cat 3512 TALE/Ariel JGH4-4 Briley 34 Cat 3512 TALE/Ariel JGH4-4 Briley 34 Cat 3516 TALE/Ariel JGK4-4 Broad Cat3516 TALE/Ariel JGK4-4 Broad Cat 3516 TALE/Ariel JGK4-4 Caledonia Cat 3516 TALE/Ariel JGK4-4 Caledonia Ajax DPC 800 Charlton Aja:xDPC800 Chester Cat 3516 TALE/Ariel JGK4-4 Comstock Hills Cat 3516 TALE/Ariel JGK4-4 Doctor's Club Cat 3516 TALE/Ariel JGK4-4 Doctor's Club Wauk 7042/Worthington OF6 Gilchrist Creek Ajax DPC 280 Gilchrist Creek Cat 3516 TALE/Ariel JGK4-4 Loud 13 Cat 3516 TALE/Ariel JGK4-4 Loud 13 Cat 3516 TALE/Ariel JGK4-4 Highway 65 Cat 3516 TALE/Ariel JGK4-4 Lakes of the North Cat 379/Ariel JGR4-4 Webber Creek Superior/White 8G825/W66 Loud 15 Cat 3516 TALE/Ariel JGK4-4 Loud 15 Cat 3516 TALE/Ariel JGK4-4 Loud 15 Wauk 817/Ariel JGM2-1 Loud 15 Cat 3516 TALE/Ariel JGK4-4 Lost Lake Woods Ajax DPC 800 Maple Forest
Schedule A - Page 6 Cat 3516 TALE/Ariel JGK4-4 Marstrand Cat 3516 TALE/Ariel JGK4-4 North Bay Cat 3512 TALE/Ariel JGH4-4 Sage Creek Cat 3516 TALE/Ariel JGK4-4 North Hardwood Cat 3516 TALE/Ariel JGK4-4 Schmitt Creek Cat 3516 TALE/Ariel JGK4-4 Schmitt Creek Cat 3516 TALE/Ariel JGK4-4 Scott Creek Ajax DPC 360 West Albert 11 Ajax DPC 360 West Albert 11
SERVICE ONLY CONTRACTS OF ROTARY COMPRESSORS DESCRIBED BELOW:
Unit # Unit Type Current Location ------ --------- ---------------- 003 S-F119701730 Joy Section 8 A4-18 005 S-G3304ITDSH233S Mid-Chariton D2-22, A3-27 016 S-G3306NA/TDSH193S Joy Section 6 & 7 017 S-G3306NAffDSH193S Hardwood Maynrich 024 S-VRG310/E12 Mid-Charlton Zeidler B3-26 028 Electric/E12 Gilchrist A 1-27 032 S-VRG310/E12 Mid-Charlton Zeidler A4-26 036 S-G3304NA/G1723 Mid-Charlton/ Pipeline Booster 038 S-VRG330/G1231 Mid-Charlton Zeidler Booster 041 S-VRG330/G1231 Mid-Chariton D4-26 044 S-VRG265/G1010 Chester D4-lA 045 S-VRG265/G1010 Chester C2-36 046 S-G3306NA/G1730 Loud 13 Joy Pipeline Booster 049 T-G3306NA/G1730 Doctors Club Section 33 Booster 052 S-G3304NAG1723 Webber Creek Booster 053 S-G3304NA/G1723 Chester D2-lA 054 S-G3304NA/G1723 Webber Creek C3-4 061 S-VRG330/G1231 Mid-Charlton A 1-25 064 S-VRG330/G1231 Loud 13 Joy Section 7 072 S-VRG330/PDX16 Chester C2-1 073 S-V RG330/PDX 16 Chester A3-I,B4-1,B 3-1 076 S-G3304NA/PDX20 Chester A 1-1/BI-1
Schedule A - Page 7 INTANGIBLES: 1. Use of Trade Name "Great Lakes Compression, Inc." and all variations of names using the words "Great Lakes" and/or "Compression". 2. Use of the current company logo consisting of a sketch of the State of Michigan with seagulls and the company name in a distinctive type style. Schedule A - Page 8 ASSET PURCHASE AGREEMENT SCHEDULE 4 ALLOCATION OF PURCHASE PRICE AMONG ACQUIRED ASSETS
Asset Description Class Allocation - ----------------- ----- ---------- Class I (Cash and Cash Equivalents) None N/A CLASS II (Actively traded personal property, certificates of deposit and foreign currency) None N/A CLASS III (Accounts receivable, mortgages and credit card receivables in the ordinary course of business) None N/A CLASS IV (Inventory and property held for sale) See Attached Supporting Data $ 50,469 CLASS V (Furniture, fixture, land, buildings and equipment) See Attached Supporting Data $7,818,713 CLASS VI (Section 197 Intangibles including patents, copyrights, licenses, non-competes, information and work-force) $ -0 CLASS VII (Goodwill and going concern value) See Attached Supporting Data $ 130,818
Asset Purchase Agreement Schedule 4--Supporting Data Class IV (Inventory and property held for sale) Spare Parts Inventory 50,469.00 --------- Total Class IV 50,469.00 =========
Class V (Furniture, fixture, land, buildings and equipment)
t Num Description - ----- ------------------- CS00 Flow Line Separator $ 7,840.00 001 6398/JGR4 $ 308,700.00 002 S-VRG220/(31010 $ 49,490.00 004 S-G3304lTDSH233S $ 98,000.00 006 S-VRG330/Broomwade $ 48,020.00 007 T-VRG310/(31210 $ 53,802.00 008 T-VRG310/(31210 $ 53,802.00 009 T-VRG310/(31210 $ 53,802.00 010 T-VRG310/(31210 $ 53,802.00 012 T-VRG310/(31210 $ 53,802.00 013 T-VRG310/(31210 $ 53,802.00 014 S-3.9 Cummins/(31010 $ 49,490.00 015 TwG3304TAAJPDX20 $ 68,600.00 019 T-VRG330/(31210 $ 53,802.00 020 T-VRG330/(31210 $ 53,802.00 025 T-VRG310/G1210 $ 53,802.00 026 T-VRG310/(31210 $ 53,802.00 027 T-VRG310/G1210 $ 53,802.00 031 S-VRG176/(31010 $ 49,490.00 033 S-VRG330/(31210 $ 51,058.00 034 S-VRG330/(31210 $ 51,058.00 037 S-VRG330/G1231 $ 52,626.00 040 S-VRG330/G1231 $ 52,626.00 042 S-VRG330/G1231 $ 52,626.00 043 S-VRG330/G1231 $ 52,626.00
047 S-G333NA/G1730 $ 86,534.00 048 S-G333NA/G1730 $ 86,534.00 051 T-G3304NA/31723 $ 87,416.00 057 T-VRG330/G1231 $ 55,370.00 058 T-VRG330/G1231 $ 55,370.00 059 T-VRG330/(31231 $ 55,370.00 060 T-VRG330/G1231 $ 55,370.00 062 S-VRG330/G1231 $ 52,626.00 063 S-VRG330/G1231 $ 52,626.00 066 S-VRG330/G1231 $ 52,626.00 071 S-VRG330/PDX16 $ 58,996.00 074 S-VRG330/PDX16 $ 58,996.00 075 S-G3304NA/PDX20 $ 80,458.00 077 S-G3306NA/PDX20 $ 86,240.00 080 S-G333NA/PDX20 $ 86,240.00 082 S-G3306TAJTDSH355S $ 156,800.00 083 S-VRG330/PDX16 $ 58,996.00 084 S-VRG330/PDX16 $ 58,996.00 085 SVRE13WPDX16 $ 58,996.00 086 S-VRG330/PDX16 $ 58,996.00 098 T-VRG330/G1210 w/pump $ 54,978.00 100 T-VRG330/G1210 w/pump $ 54,978.00 101 S-VRG330/Frick 163S $ 71,742.86 102 T VRG330/G1210 w/pump $ 54,978.00 104 S-G3406TA/PDX25 $ 154,840.00 105 S-G3406TA/PDX25 $ 156,800.00 107 S-VRG330/G1210 w/pump $ 52,430.00 108 S-VRG330/G1210 w/pump $ 52,430.00 109 S-VRG330/G1210 w/pump $ 52,430.00 110 S-VRG330/pdx16 w/pump $ 61,544.00 111 S-VRG330/pdx16 w/pump $ 61,544.00 112 S-VRG330/pdx16 w/pump $ 61,544.00 113 S-VRG330/pdx16 w/pump $ 61,544.00 114 S-VRG330/pdx16 w/pump $ 61,544.00 115 S-VRG330/pdx16 w/pump $ 61,544.00 116 S-VRG330/pdx16 w/pump $ 61,544.00
117 S-VRG330/pdx16 w/pump $ 61,544.00 118 S-VRG330/pdx16 w/pump $ 61,544.00 122 S-ES-3.9/G1210 w/pump $ 49,490.00 123 S-ES-3.9/G1210 w/pump $ 49,490.00 124 S-3306TAA/G24 LeRoi $ 118,580.00 125 S-3306TAA/G24 LeRoi $ 118,580.00 126 S-G5.9/G1210 w/pump $ 54,978.00 133 S-VRG330/pdx16 w/pump $ 61,544.00 135 S-VRG330/pdx16 w/pump $ 61,544.00 136 S-VRG330/pdx16 w/pump $ 61,544.00 137 S-VRG3301pdx16 w/pump $ 61,544.00 138 S-VRG330/pdx16 w/pump $ 61,544.00 142 T-VRG330/1200 w/pump $ 54,978.00 143 T-VRG330/1200 w/pump $ 54,978.00 144 T-VRG330/1200 w/pump $ 54,978.00 145 T-VRG330/1200 w/pump $ 54,978.00 146 T-VRG330/1200 w/pump $ 54,978.00 147 T-VRG330/1200 w/pump $ 58,800.00 148 T-VRG330/1200 w/pump $ 58,800.00 151 S-VRG330/1200 w/pump $ 52,430.00 153 2.3 LITER Ford w/generator $ 7,350.00 155 S-3304-PPDX16 (belt drive) $ 87,220.00 156 S-3304-PPDX16 (belt drive) $ 87,220.00 157 S-3304-PPDX16 (belt drive) $ 87,220.00 158 S-3304-PPDX16 (belt drive) $ 87,220.00 159 S-8.3 Cummins PDX16 $ 87,220.00 160 S-3304-PPDX16 (belt drive) $ 87,220.00 161 S-3304-PPDX16 (belt drive) $ 87,220.00 162 S-3304-PPDXI 6 (belt drive) $ 87,220.00 163 S-3304-PPDX16 (belt drive) $ 87,220.00 164 S-3306-PDX20 $ 99,442.56 166 S-398TA/JGR44 $ 98,000.00 167 Wauk 817 gen set $ 29,400.00 ------------- TOTAL COMPRESSORS $6,410,061.42 -------------
Equipment Automobiles $ 245,502.00 Trailers 10,500.00 Forklift 16,000.00 Front Loader 45,000.00 Press 650.00 Hoist 4,000.00 Tools 132,400.00 Office Equipment 5,400.00 Total Equipment $ 459,452.00 Buildings & Land 949,200.00 -------------- Total Class V $ 7,818,713.42 ============== Total Class VII (Goodwill) $ 130,817.58 -------------- TOTAL $ 8,000,000.00 ==============
ASSET PURCHASE AGREEMENT SCHEDULE 7 COMPRESSORS SOLD TO DOMINION MIDWEST ENERGY BY SELLER THAT ARE NOT INCLUDED IN ACQUIRED ASSETS:
Start-Up Horse- Unit# Unit Type Customer Location Date Power - ----- --------- -------- -------- --------- ------ 003 S-F1197/G1730 Dominion Midwest Energy Joy Section 8 A4-18 4/1/96 155 005 S-G3304/TDSH233 S Dominion Midwest Energy Mid-Chariton D2-22, 0/1/96 90 016 S-G3306NA/ITDSH193S Dominion Midwest Energy Joy Section 6 & 7 8/1/96 120 017 S-G330XA/TDSH193S Dominion Midwest Energy Hardwood Maynrich 8/1/96 120 024 S-VRG310/E12 Dominion Midwest Energy Mid-Chariton Zeidler 5/3/97 50 B3-26 028 Electric/E12 Dominion Midwest Energy Gilchrist AI-27 1/1/96 50 032 S-VRG310/E12 Dominion Midwest Energy Mid-Chariton Zeidler 7/1197 50 036 S-G3304NA/GI723 Dominion Midwest Energy Mid-Charlton/Pipeline 1/12/98 90 038 S-VRG330/G1231 Dominion Midwest Energy Mid-Charlton Zeidler 11/7197 50 041 S-VRG330/G1231 Dominion Midwest Energy Mid-Chariton D4-26 1/12/98 50 044 S-VRG265/G1010 Dominion Midwest Energy Chester D4-1 A 11/7/97 30 045 S-VRG265/G1010 Dominion Midwest Energy Chester C2-36 9/5/97 30 046 S-G3306NA/G1730 Dominion Midwest Energy Loud 13 Joy Pipeline 5/1/97 120 049 T-G3306NA/G1730 Dominion Midwest Energy Doctors Club Section 7/1/97 120 33 Booster 052 T-G3304NA/G1723 Dominion Midwest Energy Webber Creek Booster 4/1/98 90 053 S-G3304NA/G1723 Dominion Midwest Energy Chester D2-IA 5/1/98 90 054 S-G3304NA/G1723 Dominion Midwest Energy Webber Creek C3-4 5/22/98 90 061 S-VRG330/G1231 Dominion Midwest Energy Mid-Chariton A 1-25 3118198 50 064 S-VRG330/G1231 Dominion Midwest Energy Loud 13 Joy Section 7 6126/98 50 072 S-VRG330/PDX16 Dominion Midwest Energy Chester C2-1 5/7/99 55 073 S-VRG330/PDX16 Dominion Midwest Energy Chester A3-1, B4-1, 5/28/99 55 076 S-G3304NA/PDX20 Dominion Midwest Energy Chester A 1-l/B1-1 3/17199 90 078 S-G333NA/PDX20 Dominion Midwest Energy Loud 13 Joy Pipeline 4/19/99 120 079 S-G333NA/PDX20 Dominion Midwest Energy Mid-Chariton Flow 5/7199 120 Line Booster
119 S-VRG3301pdxl6 w/Pump Dominion Midwest Energy Mid-Charlton Zeidler 4/4/00 55 B4-26 120 S-ES-3.9/G 1210 w/Pump Dominion Midwest Energy Mid-Charlton Hansen 10/13/99 35 C3-26 121 S-ES-3.9/G 1210 w/Pump Dominion Midwest Energy Chester D3-1 9/21/99 35 134 S-VRG330/pdx16 w/Pump Dominion Midwest Energy Mid-Chariton 3/28/00 55 149 S-VRG330/1200 w/Pump Dominion Midwest Energy Mid-Chariton Stangor 1/10/00 55 150 S-VRG330/1200 w/Pump Dominion Midwest Energy Chester A4-2 1/12/00 55 152 3304/1200w/Pump/Generator Dominion Midwest Energy Sage Creek St. 4/5/00 85 154 S-3408TAA/ Dominion Midwest Energy Hardwood Zilka 7/14/00 440
ASSET PURCHASE AGREEMENT EXHIBIT 9(E) FORM OF CERTIFICATE OF NON-FOREIGN STATUS Under Section 1445 of the Internal Revenue Code of 1986, as amended (the "Code"), a corporation, partnership, trust or estate must withhold tax with respect to certain transfers of property if the transferor of such property is a foreign person, foreign corporation, foreign partnership, foreign trust or foreign estate. To inform Natural Gas Acquisition Corporation ("Buyer"), that no withholding is required with respect to the disposition by Great Lakes Compression, Inc. ("Seller"), of certain property described by that certain Asset Purchase Agreement between Seller and Buyer dated as of January 1, 2001, the undersigned hereby certifies to the following: 1. Seller is not a foreign person, foreign partnership, foreign corporation, foreign trust, or foreign estate (as those terms are defined in the Code and the Treasury Regulations thereunder) for purposes of U.S. income taxation; 2. The U.S. employee identification number for Seller is38-3201622; and 3. The address of Seller is: 16945 Northchase Drive Suite 1750 Houston, Texas 77060 Seller understands that this certification may be disclosed to the Internal Revenue Service by Buyer and that any false statement Seller has made herein could be punished by fine, imprisonment or both. Under penalties of perjury Seller declares that Seller has examined this certification and to the best of Seller's knowledge and belief it is true, correct, and complete. The undersigned further declares that he has authority to sign this document on behalf of Seller. Executed on March ___, 2001. By: -------------------------------- ASSET PURCHASE AGREEMENT SCHEDULE 9(I)(3) RETAINED COMPRESSION BUSINESS ASSETS All assets located in the south section (40' x 60') of the front building (#1) will be retained by Seller with the following exceptions: 1) (2) two truck hoists, attached to floor 2) Air/hydraulic press 3) Shelving units attached to building walls (unattached shelving will be retained by Seller) 4) Overhead hoist with swing arm boom 5) Waste oil heating unit and waste oil storage tanks These assets will be retained even though they may have been used from time to time by Seller for the Compression Business. Seller is retaining all assets related to the production operations (non-compression) performed for Dominion. These are the assets used by pumpers, well engine mechanics, roustabouts, rig supervisors, and production supervisors. The assets include, but not limited to: Trucks, trailers, tool boxes, hand tools, jigs, electronic equipment, spray washers, torches, welders, generators, threaders, cutters, pullers, vises, presses, parts cleaners, grinders, and others. Seller has identified to Buyer the assets to be retained by Seller during Buyer's preClosing inspection of Seller's facilities. ASSET PURCHASE AGREEMENT SCHEDULE 9(1) LIST OF EMPLOYEES Thomas Agren Joseph Barraw James Bomaster James Dillon Judith Graham Charles Grigsby Martin Jozwiak Richard Korff Keith Koronka Walter Long Nelson Maddox Keith Moss Jason Perry Shawn Radcliff Michael Rodgers Thomas Rodgers Barry Stahr Lee Thomas Jr. James Vipond Bradley Walker ASSET PURCHASE AGREEMENT SCHEDULE 9(O)(8) UNDERGROUND STORAGE TANKS There is a closed 2000 gallon concrete septic tank attached to a floor drain in the fabrication facility to accept water runoff from vehicles making deliveries into the facility. This septic tank replaces a smaller, 500 gallon tank that was removed when it was determined to be inadequate. These tanks were and are holding tanks and do not discharge on the Property. Therefore, they must be, and are, drained from time to time by a waste hauler. ASSET PURCHASE AGREEMENT SCHEDULE 11 Customers subject to lease and maintenance agreements that are, at Buyer's request, to be notified of sale and from whom Seller must obtain consent: None ASSET PURCHASE AGREEMENT SCHEDULE 12 Schedule of Work In Process
UNIT # DESCRIPTION 147 T-VRG330/1200 w/pump 148 T-VRG330/1200 w/pump 158 S-3304-PPDX16 (belt drive) 159 S-8.3 Cummins PDX16 160 S-3304-PPDX16 (belt drive) 161 S-3304-PPDX16 (belt drive) 162 S-3304-PPDX16 (belt drive) 163 S-3304-PPDX16 (belt drive)
ASSET PURCHASE AGREEMENT EXHIBIT 13(d)(1) COMPRESSOR MAINTENANCE AGREEMENTS I. COMPRESSOR MAINTENANCE AGREEMENT - ROTARY COMPRESSOR II. COMPRESSOR MAINTENANCE AGREEMENT - RECIPROCATING COMPRESSOR COMPRESSOR MAINTENANCE AGREEMENT ROTARY COMPRESSOR This Compressor Maintenance Agreement (the "Agreement") is entered into and effective as of March 21, 2001 (the "effective date"), by and between Natural Gas Acquisition Corporation, a State of Colorado corporation, located at 2911 SCR 1260, Midland, Texas 79706 (the "Contractor") and Dominion Exploration & Production, Inc., a State of Delaware corporation, located at CNG Tower, 1450 Poydras Street, New Orleans, LA 70112-6000 (the "Company"). The Contractor and the Company are referred to herein, collectively as the "Parties" and severally as a "Party". RECITALS A. Company owns the natural gas compressor packages identified in Attachment A (the "Compressors") to this Agreement. B. Contractor owns, manages, and operates a business engaged in the providing of service and maintenance for natural gas compressors. C. Contractor and Company desire to enter into this Agreement requiring Contractor to provide service and maintenance for the Compressors, subject to the terms and conditions set forth herein. TERMS OF AGREEMENT Now therefore, in consideration of the premises and the mutual promises made in this Agreement, the Parties agree as follows: 1. Term. The term of this Agreement shall commence on the effective date. This Agreement shall have an initial term that shall expire on December 31, 2005. Thereafter, the term of this Agreement shall continue on a month to month basis until terminated by either Party upon thirty days' prior written notice. 2. Services Provided. Contractor shall service the Compressors with trained persons directly employed and supervised by Contractor. The persons shall be qualified to provide, and shall provide, the services required by this Agreement in a good and workmanlike manner in accordance with the best practices of the gas compression service business and in accord with all governmental regulations. The services provided by Contractor shall include the following: (a) Daily Surveillance. Each Compressor shall be examined not less than two (2) times per week on not less than two (2) separate days. During each examination, a complete visual inspection shall be performed on each Compressor for personal and mechanical safety, and the following information shall be recorded contemporaneously in a written monthly log relating to that Compressor: (i) all gas pressures and temperatures; (ii) all oil pressures and temperatures; (iii) all jacket water and coolant pressures, and temperatures if available; (iv) engine vacuums or turbo pressure; (v) engine RPMs; (vi) unit hours; and (vii) flow rate calculation using Sony orifice computer, provided a working Barton chart recorder is attached to the compressor. A copy of the monthly log shall be attached to that month's service report and submitted to Company by the 10th working day of the following month. (b) Monthly Service. Each Compressor shall be serviced at least one (1) time each month by an employee of Contractor. During each servicing, the employee of the Contractor shall do each of the following: (i) With Compressor not running: a. change oil and filters on engine and compressor; b. change or clean and re-gap spark plugs; c. inspect ignition system and primary wiring; d. inspect all secondary wiring and replace as needed; e. check lubrication levels on starter, if applicable; f. inspect and grease bearings on cooler and idler, if applicable; g. check all level controls; h. check and adjust engine valve lash, record adjustments for wear reference; i. drain fuel bottles and check regulators; j. check dumps for setting and actuation; k. check all belts for wear and tension; l. clean or change air cleaners and crankcase breathers; and 2 m. record engine compression for wear reference. (ii) With Compressor running, no load: a. inspect carburetor and governor linkage; b. be alert for excessive noise or heat; c. check Compressor for oil leaks; and d. check all shutdowns for function and calculate and set at proper settings to protect engine and Compressor from overload conditions. (iii) With Compressor running, full load: a. check and adjust timing and record timing and adjustments in a written report; b. check engine crankcase pressure for excessive blow-by; c. check all levels; d. check for abnormal vibrations; e. check governor response; f. check entire unit for leaks and repair or recommend repairs in a written document; g. check separator scavenge return line for proper setting; and h. check all gas control valves for proper operation. The services required above shall be recorded in a written report and submitted to Company by the 10th business day of the following month via U.S. mail. (c) Repairs. Contractor shall make repairs required to correct problems identified during the course of the inspections described above. Minor repairs (repairs covered by the service fee or reasonably estimated to cost less than $500.00) shall be made immediately, without the approval of Company, during the course of the inspection or as soon thereafter as possible. Major repairs (repairs reasonably estimated to cost more than $500.00) shall be made only after Company has been advised of the required repair and has approved a good faith estimate of its cost. If the problem does not require that the compressor be shut down until repaired, Contractor's advice to Company shall be written. If the problem requires that the compressor be shutdown until repaired, Contractor's advice to Company shall be given as soon as reasonably possible and may be given verbally by telephone. In its, communications with Company, Contractor shall recommend any service or repair that it considers advisable to avoid future problems. In 3 the event that Company elects not to do repairs recommended by Contractor any failure resulting in down time due to the non-performed repair shall not count against the mechanical on-stream guarantee. (d) Parts Management Service. Contractor shall provide all parts, materials, and fluids used in conjunction with performing the services in this Agreement as follows: (i) Contractor shall maintain adequate inventory of parts, materials, and fluids necessary to operate and repair Company's Compressors; (ii) Contractor will invoice Company for parts, materials, and fluids as they are used at Contractor's cost divided by .8. 3. Service Fee. For each Compressor from time to time covered by this Agreement, Company shall pay Contractor a fee per month as provided on Attachment A. If a Compressor is added to or deleted from this Agreement, the monthly fee shall be prorated to the days of service. The service fee shall be adjusted annually on the first day of January of each year following the effective date of the Agreement. That adjustment shall be computed by multiplying the rate currently in use by two percent (2%) or the percentage increase or decrease in the average weekly earnings of Crude Petroleum and Gas Production Workers for the last calendar year compared to the preceding calendar year as shown by "The Index of Average Weekly Earnings of Crude Petroleum and Gas Production Workers" as published by the United States Department of Labor, Bureau of Labor Statistics, whichever is greater. The service fee shall be the only payment required of Company for the services described in paragraph 2 above (except as provided in paragraph 2(d)(ii)), unless additional fees and charges are specifically authorized by paragraph 4, below. The Contractor shall invoice the services provided on a monthly basis on the 15 day of the month immediately preceding the month for which the service is being rendered, and the service fee shall be due and payable by the Company within 15 days of receipt of the invoice. 4. Services Provided on a "Time-and-Material" Basis. In addition to the service fee outlined in Section 3 of this Agreement, Company shall be invoiced and shall pay for the following services provided on a "time-and-material" basis: (a) Call-outs caused by Compressor, facility, or production related failures not attributable to personnel or agents of Contractor; provided, however, call-outs during the hours of 8:00 a.m. to 5:00 p.m., Monday through Friday, shall not be charged if the daily surveillance has not been performed for that day and the repairs are completed within one (1) hour of arrival at the site. (b) Any repair that cannot be performed during the daily surveillance in a one (1) hour time period; (c) Special repairs or services requested by personnel of Company which are not otherwise outlined in this Agreement; (d) Top-end overhauls, including but not limited to cylinder head replacements, and other major overhauls which will be performed at straight, regular time 4 rates only and only during the hours of 8:00 a.m. to 5:00 p.m., Monday through Friday exclusive of legal holidays, unless approved at overtime rates by the Company, and which repairs must be approved in advance either in writing or verbally by personnel of Company. 5. Mechanical On-Stream Guarantee. With regard to each compressor unit covered by this Agreement, Contractor shall provide a minimum of 95 percent availability on-stream mechanical line time. Ninety-five percent availability means that the unit will not be mechanically unavailable more than 36 hours per month. Should Contractor fail to provide 95 percent availability during any calendar month after the first thirty (30) days of operation, Contractor shall reduce that month's invoice by 1/684 for each one (1) hour below 684 hours that a unit is not available for that calendar month (the "penalty"). The penalty shall not begin to accrue until twelve (12) hours after Company notifies Contractor that the compressor is down. Downtime for the convenience of Company or for reasons unrelated to Company's maintenance shall be considered as mechanically available time for the purpose of calculating monthly on-stream time. If Contractor fails to provide a minimum of 95 percent runtime for two (2) consecutive months, Company may request both a written explanation and a plan to remedy the situations causing the downtime (the "request"). Contractor shall respond to the request with an explanation and a plan acceptable to Company. If Contractor cannot bring the runtime to a minimum of 95 percent for the 30 days following the request, Company shall have the right to terminate this Agreement with regard to the affected unit upon written notice to Contractor without penalty or any requirement of substitution. A request for credit with substantiation of downtime must be made in writing and must be received by Contractor within 15 days of the month in which 95 percent on-stream time was not made or that month shall be resumed to have made 95 percent on-stream time. 6. Release and Indemnity. Contractor hereby releases Company, its parent, subsidiary, and affiliated companies, and the directors, officers, employees, agents and representatives of all the above ("Company Group") from all liability, and agrees to defend, indemnify, and hold Company Group harmless from and against any and all liabilities, claims, demands, damages, losses, liens, causes of action suits, judgments, and costs or expenses of any nature, kind, or description (including without limitation, reasonable attorney fees, court costs, fines, penalties and interest), asserted by or arising in favor of Contractor or Contractor's employees or agents for personal or bodily injury, illness, or death, or the loss or damage of property, occurring as a result of Contractor's activities hereunder, unless such injury, illness, death, loss or damage is the result of Company Group's gross negligence or willful misconduct; and provided that Company gives Contractor prompt notice of such liability, claim, demand, damage, loss, lien or cause of action, cooperates with Contractor during Contractor's defense of same, and provided further that Contractor has the sole ability to settle and compromise all such liabilities, claims, demands, damages, losses, liens and/or causes of action. EXCEPT AS SPECIFICALLY PROVIDED ABOVE, THE RELEASE AND INDEMNITIES GRANTED HEREIN ARE GIVEN REGARDLESS OF FAULT OR THE CAUSE OF OR REASON FOR ANY LOSS OR LIABILITY COVERED BY ANY SUCH INDEMNITY, INCLUDING, BUT NOT LIMITED TO, THE SOLE, JOINT OR CONCURRENT NEGLIGENCE OF COMPANY, WHETHER ACTIVE OR PASSIVE, STRICT LIABILITY, PREMISES LIABILITY, DEFECTS IN EQUIPMENT, OR PRE-EXISTING CONDITIONS. 5 7. Insurance. Contractor, at its sole cost and expense (and with deductibles for As own account) shall procure and shall at all times during the term of this Agreement, and during the performance of work hereunder, maintain in force with insurance companies which maintain a Bests Rating of A-VII or better, and are authorized to do business in the state or states in which services are to be performed by Contractor, the types and minimum amounts of insurance as shown in Attachment B hereto. Prior to the commencement of work or services hereunder, Contractor shall furnish Company with Certificates of Insurance evidencing the coverage and conditions required by this Agreement and Attachment B. Contractor shall contractually require and shall cause all subcontractors performing work in this Agreement to comply with the provisions of this Section 7 such that all subcontractors shall owe to Company the same duties respecting insurance as are owed by Contractor. 8. Miscellaneous Provisions. (a) Governing Law. This Agreement, including without limitation, its interpretation, validity, construction, breach, and enforcement, and the rights and obligations of the Parties hereunder, shall be governed exclusively by the law of the State of Michigan (excluding any conflicts of law rules which might apply or refer the matter to the law of another jurisdiction). Venue of any lawsuit arising from or in connection with the terms of this Agreement shall be in Grand Traverse County, Michigan. The parties waive their rights to a jury trial. (b) Entire Agreement. This Agreement between the Parties and supersedes all prior agreements, understandings, negotiations and discussions regarding the subject matter hereof, whether oral or written, of the Parties. No supplement, amendment, alteration, modification, waiver or termination of this Agreement shall be binding unless executed in writing by the Parties. (c) Waiver. No waiver of any provision of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof (whether or not similar) nor shall such waiver constitute a continuing waiver unless other expressly provided. (d) Captions. The captions in this Agreement are for convenience only and shall not be considered a part of or affect the construction or interpretation of any provision of this Agreement. (e) Assignment. Neither Party shall assign this Agreement, or any of its rights or obligations hereunder, without the prior written consent of the other Party, which consent may be withheld in such other Party's sole discretion. (f) Notices. Any written notice provided or permitted to be given or permitted to be given under this Agreement may be served by personal delivery or by registered or certified U.S. mail, addressed to the Party to be notified, postage prepaid, return receipt requested. Notice deposited in the mail in any manner herein above described shall be deemed to have been given and received on the date of the delivery as shown on the return receipt. Written notice may also be given by Federal Express or other nationally recognized courier service and shall be deemed to have been given and 6 received on the date of delivery to the address by such service. Written notice served in any other manner (including by facsimile delivery) shall be deemed to have been given and received only if and when actually received by the addressee. For the purposes of notice, the addresses of the Parties shall be as follows: Contractor: Natural Gas Acquisition Corporation 2911 SCR 1260 Midland, Texas 79706 Attention: Telephone: Fax: Company: Dominion Exploration & Production, Inc. c/o Dominion Midwest Energy, Inc. 226 East 16th Street Traverse City, Michigan 49684 Attention: Ray Barnhart Telephone: (231) 022-7302 Fax: (231) 922-0892 Each Party shall have the right, upon giving three days prior notice to the other in the manner herein above provided, to change its address for the purposes of notice to any other street address. (g) Severability. The invalidity of any one or more provisions of this Agreement shall not affect the validity of this Agreement as a whole, and in the case of any such invalidity, this Agreement shall be construed as if the invalid provision had not been included herein. (h) Not Construed Against Drafter. The Parties acknowledge that they have read this Agreement, have had the opportunity to review it with an attorney of their respective choice, and have agreed to all of As terms. Under these circumstances, the Parties agree that the rule of construction that a contract be construed against the drafter shall not be applied in interpreting this Agreement, and that in the event of any ambiguity in any of the terms or conditions of this Agreement, including any exhibits hereto, and whether or not placed of record, such ambiguity shall not be construed for or against either Party on the basis that such Party did or did not author the same. (i) Time of Performance. Time is of the essence in the performance of all covenants and obligations under this Agreement. 7 IN WITNESS WHEREOF, the Parties have executed this Agreement as of the day and year first above written. Contractor: NATURAL GAS ACQUISITION CORPORATION By: ----------------------------------- Its: ------------------------------ Company: DOMINION EXPLORATION & PRODUCTION, INC. By: ----------------------------------- Its: ------------------------------ 8 ATTACHMENT A TO COMPRESSOR MAINTENANCE AGREEMENT ROTARY COMPRESSOR
MONTHLY SERVICE UNIT # UNIT TYPE LOCATION REVENUE - ------ --------- -------- ------- 003 S-F1197/G1730 Joy Section 8 A4-18 $ 550 005 S-G3304/TDSH233S Mid-Charlton D2-22, A3-27 $ 325 016 S-G3306NA/TDSH193S Joy Section 6 & 7 $ 420 017 S-G3306NA/TDSH193S Hardwood Maynrich $ 420 024 S-VRG310/E12 Mid-Charlton Zeidler B3-26 $ 225 028 Electric/E12 Gilchrist A1-27 $ 150 032 S-VRG310/E12 Mid-Charlton Zeidler A4-26 $ 225 036 S-G3304NA/G1723 Mid-Charlton/Pipeline Booster $ 325 038 S-VRG330/G1231 Mid-Charlton Zeidler Booster $ 225 041 S-VRG330/G1231 Mid-Charlton D4-26 $ 225 044 S-VRG265/G1010 Chester D4-1A $ 225 045 S-VRG265/G1010 Chester C2-36 $ 225 046 S-G3306NA/G1730 Loud 13 Joy Pipeline Booster $ 420 049 T-G3306NA/G1730 Doctors Club Section 33 Booster $ 420 052 S-G3304NAG1723 Webber Creek Booster $ 325 053 S-G3304NA/G1723 Chester D2-1A $ 325 054 S-G3304NA/G1723 Webber Creek C3-4 $ 325 061 S-VRG330/G1231 Mid-Charlton A 1-25 $ 225 064 S-VRG330/G1231 Loud 13 Joy Section 7 $ 225 072 S-VRG330/GPDX16 Chester C2-1 $ 225 073 S-VRG330/GPDX16 Chester A3-1, B4-1, B3-1 $ 225 076 S-G3304NA/PDX20 Chester A1-1/b1-1 $ 325 078 S-G333NA/PDX20 Loud 13 Joy Pipeline Booster $ 420 079 S-G333NA/PDX20 Mid-Charlton Flow Line Booster $ 420 119 S-VRG330/pdx16 w/Pump Mid-Charlton Zeidler B4-26 $ 225 120 S-ES-3.9/G1210 w/Pump Mid-Charlton Hansen C3-26 $ 175 121 S-ES-3.9/G1210 w/Pump Chester D3-1 $ 175 134 S-VRG330/pdx16 w/Pump Mid-Charlton Pipeline Booster $ 225 149 S-VRG330/1200 w/Pump Mid-Charlton Stangor A2-25 $ 225 150 S-VRG330/1200 w/Pump Chester A4-2 $ 225
152 3304/1200w/Pump/Generator Sage Creek St. Albert 1-11 $ 325 154 S-3408TAA/ Hardwood Zilka Flowline Booster $ 750 011 S-VRG220/G1010 Marstrand (Sold) A2-35 $ 200 021 S-VRG330/E12 Marstrand (Sold) D4-27 $ 200 022 S-VRG310/E12 Marstrand (Sold) C3-35 $ 200 023 S-VRG310/E12 Marstrand (Sold) D1-27 $ 200 030 S-VRG220/G1010 Marstrand (Sold) D3-35 $ 200 035 S-VRG330/G1210 Marstrand (Sold) A3-34 $ 200 039 S-VRG330/G1231 Marstrand (Sold) D3-27 $ 200 055 S-VRG283/G1010 Marstrand (Sold) B1-34 $ 200 056 S-VRG283/G1010 Marstrand (Sold) A3-35 $ 200 065 S-VRG330/G1231 Marstrand (Sold) C1-27 $ 200 ------- $11,745
Attachment A - Page 2 ATTACHMENT B INSURANCE General Requirements The term Company as used in this Attachment B includes Company and its parent, subsidiaries, affiliates, and partnerships, and its and their respective officers, directors, employees, and insurers, and those with whom Company and its parent, subsidiaries, affiliates and partnerships, may be associated as co-lessees, partners or joint venturers. Each of the insurance policies maintained by Contractor, for work performed under this Agreement, shall be endorsed as follows, in addition to any other requirements. (a) To provide to Company thirty (30) days written notice of cancellation, reduction of coverage or material change. (b) For liabilities and indemnities assumed under this Agreement by Contractor, all of Contractor's insurance, inclusive of but not limited to those described below, shall be endorsed to provide that the underwriters and/or insurers thereof waive their rights of subrogation against Company. (c) For liabilities and indemnities assumed by Contractor under this Agreement, Company shall be endorsed and named on Contractor's insurance described below as additional insured (except as respects Worker's Compensation insurance). Such insurance shall be primary to, and receive no contribution from, any insurance maintained by or on behalf of the Company. Company shall not be responsible or liable for any deductibles, self-insured retentions and/or premiums of Contractor's insurance. Contractor's insurance shall not be reduced, voided, waived or in any other manner limited as respects Company in the event Contractor violates any warranties, terms or conditions or Contractor's insurance. (d) Contractor shall maintain a deductible level not greater than its year end working capital value. Specific Insurance Requirements (a) Commercial General Liability Insurance provided as "claims made" coverage which shall be endorsed specifically to include Property Damage coverage arising from explosion, collapse or underground damage, Products/Completed Operations liability for at least two years after completion of work and Broad Form Contractual liability coverage. This coverage should afford bodily injury and property damage coverage with policy limits not less than: Bodily Injury and Property Damage Combined: $1,000,000 per occurrence and aggregate (b) Commercial Automobile Liability Insurance affording bodily injury and property damage coverage on all owned, non-owned, and hired vehicles with policy limits of not less than: Bodily Injury and Property Damage Combined: $1,000,000 combined single limit (c) Worker's Compensation and Employer's Liability Insurance with policy limits of not less than: Worker's Compensation Statutory Employer's Liability: $1,000,000 Bodily Injury by accident, each accident $1,000,000 Bodily Injury by disease, policy limit $1,000,000 Bodily Injury by disease, each employee (d) Excess or Umbrella Liability Insurance affording coverage in excess of the limits of the Commercial General Liability, Commercial Automobile Liability and Employer's Liability insurance polices required above, with policy limits of note less than: $5,000,000 per occurrence or accident and $5,000,000 in the aggregate Attachment B - Page 2 ASSET PURCHASE AGREEMENT EXHIBIT 13(d)(1) COMPRESSOR MAINTENANCE AGREEMENT RECIPROCATING COMPRESSOR This Compressor Maintenance Agreement (the "Agreement") is entered into and effective as of March 21,2001 (the "effective doe), by and between Natural Gas Acquisition Corporation, a State of Colorado corporation, located at 2911 SCR 1260, Midland, Texas 79706 (the "Contractor") and Dominion Exploration & Production, Inc., a State of Delaware corporation, located at CNG Tower, 1450 Poydras Street, New Orleans, LA 70112-6000 (the "Company"). The Contractor and the Company are referred to herein collectively as the "Parties" and severally as a "Party". RECITALS A. Company owns the natural gas compressor packages identified in Attachment A (the "Compressors") to this Agreement. B. Contractor owns, manages, and operates a business engaged in the providing of service and maintenance for natural gas compressors. C. Contractor and Company desire to enter into this Agreement requiring Contractor to provide service and maintenance for the Compressors, subject to the terms and conditions set forth herein. TERMS OF AGREEMENT Now therefore, in consideration of the premises and the mutual promises made in this Agreement, the Parties agree as follows: 1. Term. The term of this Agreement shall commence on the effective date. This Agreement shall have an initial term that shall expire on December 31, 2005. Thereafter, the tern of this Agreement shall continue on a month to month basis until terminated by either Party upon thirty days' prior written notice. 2. Services Provided. Contractor shall service the Compressors with trained persons directly employed and supervised by Contractor. The persons shall be qualified to provide the services required by this Agreement in a good and workmanlike manner in accordance with the best practices of the gas compression service business and in accord with all governmental regulations. The services provided by Contractor shall include the following: (a) Daily Surveillance. Each Compressor shall be examined not less than five (5) times per week on not less than five (5) separate days. During each examination, a complete visual inspection shall be performed on each Compressor for personal and mechanical safety, and the following information shall be recorded contemporaneously in a written log relating to that Compressor: (i) all gas pressures and temperatures; (ii) all oil pressures and temperatures; (iii) all jacket water and coolant pressures ,and temperatures if available; (iv) engine vacuums or turbo pressure; (v) engine RPMs; (vi) unit hours; and (vi) flow rate calculation using a Sony orifice computer or the actual readings from a digital flow meter. A copy of the monthly log shall be attached to that month's service report and submitted to Company by the 10th working day of the following month. (b) Monthly Service. Each Compressor shall be serviced at least one (1) time each month by three employees of Contractor (unless the Compressor is an Ajax unit, in which case it shall be serviced by two employees of Contractor). During each servicing, the employees of the Contractor shall do each of the following: (i) With Compressor not running: a. change oil and filters on engine and compressor; b. change or clean and re-gap spark plugs; c. inspect ignition system and primary wiring; d. inspect all secondary wiring and replace as needed; e. check lubrication levels on starter, if applicable; f. inspect and grease bearings on cooler and idler; g. check all level controls; h. check and adjust engine valve lash, record adjustments for wear reference; i. drain fuel bottles and check regulators; j. check dump for setting and actuation; k. check all belts for wear and tension; -2- l. clean or change air cleaners and crankcase breathers; and m. record engine compression for wear reference. (ii) With Compressor running, no load: a. adjust engine for maximum vacuum and record; b. lubricate carburetor and governor linkage; c. be alert for excessive noise or heat; d. check Compressor for oil and water leaks; and e. check all shutdowns for function and calculate for proper settings to protect engine and Compressor from overload or rod load conditions. (iii) With Compressor running, full load: a. check and adjust timing and record timing and adjustments in a written report; b. check engine crankcase pressure and record pressure in a written report; c. check all levels; d. check for abnormal vibrations; e. check governor response; f. check Compressor packing for leaks and recommend any repairs in a written document; g. check Compressor lube rate, record rate in a written report, and adjust rate to meet manufacturer's specifications; and h. calculate engine horsepower and rod load conditions. The services required above shall be recorded in a written report and submitted to Company by the 10th business day of the following month via U.S. mail. (c) Semi-annual Service. The following services shall be performed on each Compressor at six (6) month intervals per year: (i) check crosshead clearance and record clearance in a written report; and -3- (ii) pull inspection doors and visually inspect Compressor internals and crankcase. The report of the semi-annual service shall be submitted to Company by the 10th working day of the following month. (d) Repairs. Contractor shall make repairs required to correct problems identified during the course of the inspections described above. Minor repairs (repairs covered by the service fee or reasonably estimated to cost less than $2500.00) shall be made immediately, without the approval of Company, during the course of the inspection or as soon thereafter as possible. Major repairs (repairs reasonably estimated to cost more than $2500.00) shall be made only after Company has been advised of the required repair and has approved a good faith estimate of its cost. If the problem does not require that the compressor be shut down until repaired, Contractor's advice to Company shall be written. If the problem requires that the compressor be shutdown until repaired, Contractor's advice to Company shall be given as soon as reasonably possible and may be given verbally by telephone. In its communications with Company, Contractor shall recommend any service or repair that it considers advisable to avoid future problems. In the event that Company elects not to do repairs recommended by Contractor any failure resulting in down time due to the non-performed repair shall not count against the mechanical on-stream guarantee. (e) Parts Management Service. Contractor shall provide complete parts management for items used in conjunction with performing the services in this Agreement as follows: (i) Contractor shall research vendors and procure parts and necessary third party services to maintain the Compressors; (ii) Contractor shall provide secure storage for all parts and supplies owned by Company. However, Contractor shall have no liability to Company for loss in any fashion of parts stored for the convenience of Company; (iii) Contractor shall order all parts and/or services from Company's vendors and the vendors shall invoice Company directly. However, if Contractor has established an OEM/distributor arrangement with a vendor and can provide the parts and/or services at prices equal to those which Company can obtain directly from its vendors, Contractor shall be permitted to obtain the parts and/or services directly and invoice Company for the parts and/or services. 3. Service Fee. For each Compressor from time to time covered by this Agreement, Company shall pay Contractor a fee as set out in Attachment A. If a Compressor is added to or deleted from this Agreement, the monthly fee shall be prorated to the, days of service. The service fee shall be adjusted annually on the first day of January of each year following the effective date of the Agreement. That adjustment shall be computed by multiplying the rate currently in use by two percent (2%) or the percentage increase or decrease in the average weekly earnings of Crude Petroleum and Gas Production Workers for the last calendar year -4- compared to the preceding calendar year as shown by "The Index of Average Weekly Earnings of Crude Petroleum and Gas Production Workers" as published by the United States Department of Labor, Bureau of Labor Statistics, whichever is greater. The service fee shall be the only payment required of Company for the services described in paragraph 2 above, unless additional fees and charges are specifically authorized by paragraph 4, below. The Contractor shall invoice the services provided on a monthly basis on the 15th day of the month immediately preceding the month for which the service is being rendered, and the service fee shall be due and payable by the Company within 15 days of receipt of the invoice. 4. Services Provided on a "Time-and-Material" Basis. In addition to the service fee outlined in Section 3 of this Agreement, Company shall be invoiced and shall pay for the following services provided on a "time-and-material" basis: (a) Call-outs caused by Compressor, facility, or production related failures not attributable to personnel or agents of Contractor; provided, however, call-outs during the hours of 8:00 a.m. to 5:00 p.m., Monday through Friday, shall not be charged if the daily surveillance has not been performed for that day and the repairs are completed within three (3) hour of arrival at the site. In the event a repair is made that takes in excess of one (1) hour but not more than three (3) hours, Contractor may omit the surveillance check as provided in paragraph 2(a), above, on one compressor unit scheduled for that day for each hour in excess of one (1) hour taken in making the repair. For this purpose, a fraction of an hour exceeding thirty minutes shall be regarded as a full hour (e.g., a repair of two hours forty-five minutes will justify omitting two surveillance checks). In the case of an omitted surveillance check as herein provided, any unavailable mechanical time until the next scheduled surveillance shall not be counted against Contractor under paragraph 5, below. Contractor shall promptly that same day notify Company of any omitted surveillance checks. (b) Any repair that cannot be performed during the daily surveillance in a three (3) hour time period; (c) Special repairs or services requested by personnel of Company which are not otherwise outlined in this Agreement; (d) Top-end overhauls, including but not limited to cylinder head replacements, and other major overhauls which will be performed at straight, regular time rates only and only during the hours of 8:00 am. to 5:00 p.m., Monday through Friday exclusive of legal holidays, unless approved at overtime rates by the Company, and which repairs must be approved in advance in writing or verbally by personnel of Company. 5. Mechanical On-Stream Guarantee. With regard to each compressor unit covered by this Agreement, Contractor shall provide a minimum of 97 percent availability on-stream mechanical line time. Ninety-seven percent availability means that the unit will not be mechanically unavailable more than 21.6 hours per month. Should Contractor fail to provide 97 percent availability during any calendar month after the first thirty (30) days of operation, Contractor shall reduce that month's invoice by 1/698.4 for each one (1) hour below 698.4 hours -5- that a unit is not available for that calendar month (the "penalty"). The penalty shall not begin to accrue until two (2) hours after Company notifies Contractor that the compressor is down. Downtime for the convenience of Company or for reasons unrelated to Company's maintenance, or waiting for parts shall be considered as mechanically available time for the purpose of calculating monthly on-stream time. If Contractor fails to provide a minimum of 97 percent runtime for two (2) consecutive months, Company may request both a written explanation and a plan to remedy the situations causing the downtime (the "request"). Contractor shall respond to the request with an explanation and a plan acceptable to Company. If Contractor cannot bring the runtime to a minimum of 97 percent for the 30 days following the request, Company shall have the right to terminate this Agreement with regard to the affected unit upon written notice to Contractor without penalty or any requirement of substitution. A request for credit with substantiation of downtime must be made in writing and must be received by Contractor within 15 days of the month in which 97 percent on-stream time was not made or that month shall be presumed to have made 97 percent of-stream time. 6. Termination Provisions for Compressors No Loner Required. In the event Company no longer needs a compressor described in Exhibit A and wishes to discontinue this contract on that compressor, Company shall notify Contractor of its intent to terminate the contract on that particular compressor by giving Contractor 90 days prior written notice. In consideration of cancellation, Contractor may either pay out the remaining portion of the contract or add a revenue stream equal to that revenue lost by reason of such cancellation either from additional units for maintenance or adding additional horse power commitment over and above that commitment of 5000 h.p. that is the subject of a certain Commitment Agreement between the parties dated as of January 1, 2001. The additional units can either be leased or purchased. 7. Release and Indemnity. Contractor hereby releases Company, its parent, subsidiary, and affiliated companies, and the directors, officers, employees, agents and representatives of all the above ("Company Group") from all liability, and agrees to defend, indemnify, and hold Company Group harmless from and against any and all liabilities, claims, demands, damages, losses, liens, causes of action suits, judgments, and costs or expenses of any nature, kind, or description (including without limitation, reasonable attorney fees, court costs, fines, penalties and interest), asserted by or arising in favor of Contractor or Contractor's employees or agents for personal or bodily injury, illness, or death, or the loss or damage of property, occurring as a result of Contractor's activities hereunder, unless such injury, illness, death, loss or damage is the result of Company Group's gross negligence or willful misconduct; and provided that Company gives Contractor prompt notice of such liability, claim, demand, damage, loss, lien or cause of action, cooperates with Contractor during Contractor's defense of same, and provided further that Contractor has the sole ability to settle and compromise all such liabilities, claims, demands, damages, losses, liens and/or causes of action. EXCEPT AS SPECIFICALLY PROVIDED ABOVE, THE RELEASE AND INDEMNITIES GRANTED HEREIN ARE GIVEN REGARDLESS OF FAULT OR THE CAUSE OF OR REASON FOR ANY LOSS OR LIABILITY COVERED BY ANY SUCH INDEMNITY, INCLUDING, BUT NOT LIMITED TO, THE SOLE, JOINT OR CONCURRENT NEGLIGENCE OF COMPANY, WHETHER ACTIVE OR PASSIVE, STRICT LIABILITY, PREMISES LIABILITY, DEFECTS IN EQUIPMENT, OR PRE-EXISTING CONDITIONS. -6- 8. Insurance. Contractor, at its sole cost and expense (and with deductibles for its own account) shall procure and shall at all times during the term of this Agreement, and during the performance of work hereunder, maintain in force with insurance companies which maintain a Bests Rating of A-VII or better, and are authorized to do business in the state or states in which services are to be performed by Contractor, the types and minimum amounts of insurance as shown in Attachment B hereto. Prior to the commencement of work or services hereunder, Contractor shall furnish Company with Certificates of Insurance evidencing the coverage and conditions required by this Agreement and Attachment B. Contractor shall contractually require and shall cause all subcontractors performing work in this Agreement to comply with the provisions of this Section 8 such that all subcontractors shall owe to Company the same duties respecting insurance as are owed by Contractor. 9. Miscellaneous Provisions. (a) Governing Law. This Agreement, including without limitation, its interpretation, validity, construction, breach, and enforcement, and the rights and obligations of the Parties hereunder, shall be governed exclusively by the law of the State of Michigan (excluding any conflicts of law rules which might apply or refer the matter to the law of another jurisdiction). Venue of any lawsuit arising from or in connection with the terms of this Agreement shall be in Grand Traverse County, Michigan. The parties waive the rights to a jury trial. (b) Entire Agreement. This Agreement supersedes all prior agreements, understandings, negotiations and discussions regarding the subject matter hereof, whether oral or written, of the Parties. No supplement, amendment, alteration, modification, waiver or termination of this Agreement shall be binding unless executed in writing by the Parties. (c) Waiver. No waiver of any provision of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof (whether or not similar) nor shall such waiver constitute a continuing waiver unless other expressly provided. (d) Captions. The captions in this Agreement are for convenience only and shall not be considered a part of or affect the construction or interpretation of any provision of this Agreement. (e) Assignment. Neither Party shall assign this Agreement, or any of its rights or obligations hereunder, without the prior written consent of the other Party, which consent may be withheld in such other Party's sole discretion. (f) Notices. Any written notice provided or permitted to be given or permitted to be given under this Agreement may be served by personal delivery or by registered or certified U.S. mail, addressed to the Party to be notified, postage prepaid, return receipt requested. Notice deposited in the mail in any manner herein above described shall be deemed to have been given and received on the date of the delivery as shown on the return receipt. Written notice may also be given by Federal Express or other nationally recognized courier service and shall be deemed to have been given and -7- received on the date of delivery to the address by such service. Written notice served in any other manner (including by facsimile delivery) shall be deemed to have been given and received only if and when actually received by the addressee. For the purposes of notice, the addresses of the Parties shall be as follows: Contractor: Natural Gas Acquisition Corporation 2911 SCR 1260 Midland, Texas 79706 Attention: Telephone: Fax: Company: Dominion Exploration & Production, Inc. c/o Dominion Midwest Energy, Inc. 226 East 16th Street Traverse City, Michigan 49684 Attention: Ray Barnhart Telephone: (231) 922-7302 Fax: (231) 922-0892 Each Party shall have the right, upon giving three days prior notice to the other in the manner herein above provided, to change its address for the purposes of notice to any other street address. (g) Severability. The invalidity of any one or more provisions of this Agreement shall not affect the validity of this Agreement as a whole, and in the case of any such invalidity, this Agreement shall be construed as if the invalid provision had not been included herein. (h) Not Construed Against Drafter. The Parties acknowledge that they have read this Agreement, have had the opportunity to review it with an attorney of their respective choice, and have agreed to all of its terms. Under these circumstances, the Parties agree that the rule of construction that a contract be construed against the drafter shall not be applied in interpreting this Agreement, and that in the event of any ambiguity in any of the terms or conditions of this Agreement, including any exhibits hereto, and whether or not placed of record, such ambiguity shall not be construed for or against either Party on the basis that such Party did or did not author the same. (i) Time of Performance. Time is of the essence in the performance of all covenants and obligations under this Agreement. -8- IN WITNESS WHEREOF, the Parties have executed this Agreement as of the day and year first above written. Contractor: NATURAL GAS ACQUISITION CORPORATION By: ------------------------------------ Its: ------------------------------------ Company: DOMINION EXPLORATION & PRODUCTION, INC. By: ------------------------------------ Its: ------------------------------------ -9- ATTACHMENT A TO COMPRESSOR MAINTENANCE AGREEMENT RECIPROCATING COMPRESSOR
Monthly Service Unit Type Customer Location Revenue - --------- -------- -------- ------- Cat 3516 TALE/Ariel/GK4-4 Dominion Midwest Briley 34 $ 2,025 Cat 3516 TALE/Ariel/GK4-4 Dominion Midwest Briley 34 $ 2,025 Cat 3512 TALE/Ariel/GH4-4 Dominion Midwest Briley 34 $ 1,825 Cat 3512 TALE/Ariel/GH4-4 Dominion Midwest Briley 34 $ 1,825 Cat 3516 TALE/Ariel/GK4-4 Dominion Midwest Broad $ 2,025 Cat 3516 TALF/Ariel/GK4-4 Dominion Midwest Broad $ 2,025 Cat 3516 TALE/Ariel/GK4-4 Dominion Midwest Caledonia $ 2,025 Cat 3516 TALF/Ariel/GK4-4 Dominion Midwest Caledonia $ 2,025 Ajax DPC 800 Dominion Midwest Charlton $ 1,825 Ajax DPC 800 Dominion Midwest Chester $ 1,825 Cat 3516 TALE/Ariel/GK4-4 Dominion Midwest Comstock Hills $ 2,025 Cat 3516 TALE/Ariel/GK4-4 Dominion Midwest Doctor's Club $ 2,025 Cat 3516 TALE/Ariel/GK4-4 Dominion Midwest Doctor's Club $ 2,025 Wauk 7042/Worthington OF6 Dominion Midwest Gilchrist Creek $ 2,025 Ajax DPC 2 80 Dominion Midwest Gilchrist Creek $ 1,025 Cat 3516 TALE/Ariel/GK4-4 Dominion Midwest Loud 13 $ 2,025 Cat 3516 TALE/Ariel/GK4-4 Dominion Midwest Loud 13 $ 2,025 Cat 3516 TALE/Ariel/GK4-4 Dominion Midwest Highway 65 $ 2,025 Cat 3516 TALE/Ariel/GK4-4 Dominion Midwest Lakes of the North $ 2,025 Cat 3 79/Ariel/GR4-4 Dominion Midwest Webber Creek $ 1,825 Superior/White 8G825/W66 Dominion Midwest Loud 15 $ 2,425 Cat 3516 TALE/Ariel/GK4-4 Dominion Midwest Loud 15 $ 2,025 Cat 3516 TALE/Ariel/GK4-4 Dominion Midwest Loud 15 $ 2,025 Wauk 817/Ariel/GM 2-1 Dominion Midwest Loud 15 $ 625 Cat 3516 TALE/Ariel/GK4-4 Dominion Midwest Lost Lake Woods $ 2,025 Ajax DPC 800 Dominion Midwest Maple Forest $ 1,825 Cat 3516 TALE/Ariel/GK4-4 Dominion Midwest Marstrand $ 2,025 Cat 3516 TALE/Ariel/GK4-4 Dominion Midwest North Bay $ 2,025 Cat 3512 TALE/Ariel/GH4-4 Dominion Midwest Sage Creek $ 1,825 Cat 3516 TALE/Ariel/GK4-4 Dominion Midwest North Hardwood $ 2,025 Cat 3516 TALE/Ariel/GK4-4 Dominion Midwest Schmitt Creek $ 2,025 Cat 3516 TALE/Ariel/GK4-4 Dominion Midwest Schmitt Creek $ 2,025 Cat 3516 TALE/Ariel/GK4-4 Dominion Midwest Scott Creek $ 2,025 Ajax DPC 360 Dominion Midwest West Albert 11 $ 1,225 Ajax DPC 360 Dominion Midwest West Albert 11 $ 1,225 --------- $ 65,875
-10- ATTACHMENT B INSURANCE General Requirements The tern Company as used in this Attachment B includes Company and its parent, subsidiaries, affiliates, and partnerships, and its and their respective officers, directors, employees, and insurers, and those with whom Company and its parent, subsidiaries, affiliates and partnerships, may be associated as co-lessees, partners or joint venturers. Each of the insurance policies maintained by Contractor, for work performed under this Agreement, shall be endorsed as follows, in addition to any other requirements. (a) To provide to Company thirty (30) days written notice of cancellation, reduction of coverage or material change. (b) For liabilities and indemnities assumed under this Agreement by Contractor, all of Contractor's insurance, inclusive of but not limited to those described below, shall be endorsed to provide that the underwriters and/or insurers thereof waive their rights of subrogation against Company. (c) For liabilities and indemnities assumed by Contractor under this Agreement, Company shall be endorsed and named on Contractor's insurance described below as additional insured (except as respects Worker's Compensation insurance). Such insurance shall be primary to, and receive no contribution from, any insurance maintained by or on behalf of the Company. Company shall not be responsible or liable for any deductibles, self-insured retentions and/or premiums of Contractor's insurance. Contractor's insurance shall not be reduced, voided, waived or in any other manner limited as respects Company in the event Contractor violates any warranties, terms or conditions or Contractor's insurance. (d) Contractor shall maintain a deductible level not greater than its year end working capital value. Specific Insurance Requirements (a) Commercial General Liability Insurance provided as "claims made" coverage which shall be endorsed specifically to include Property Damage coverage arising from explosion, collapse or underground damage, Products/Completed Operations liability for at least two years after completion of work and Broad Form Contractual liability coverage. This coverage should afford bodily injury and property damage coverage with policy limits not less than: Bodily Injury and Property Damage Combined: $1,000,000 per occurrence and aggregate (b) Commercial Automobile Liability Insurance affording bodily injury and property damage coverage on all owned, non-owned, and hired vehicles with policy limits of not less than: Bodily Injury and Property Damage Combined: $1,000,000 combined single limit (c) Worker's Compensation and Employer's Liability Insurance with policy limits of not less than: Worker's Compensation Statutory Employer's Liability: $1,000,000 Bodily Injury by accident, each accident $1,000,000 Bodily Injury by disease, policy limit $1,000,000 Bodily Injury by disease, each employee (d) Excess or Umbrella Liability Insurance affording coverage in excess of the limits of the Commercial General Liability, Commercial Automobile Liability and Employer's Liability insurance polices required above, with policy limits of note less than: $5,000,000 per occurrence or accident and $5,000,000 in the aggregate -2- ASSET PURCHASE AGREEMENT EXHIBIT 13(d)(2) COMMITMENT AGREEMENT THIS AGREEMENT is made and entered into this 21st day of March, 2001, by and between NATURAL GAS ACQUISITION CORPORATION, of 2911 SCR 1260, Midland, Texas 79706 (herein "Seller"), and DOMINION EXPLORATION & PRODUCTION, INC. of CNG Tower, 1450 Poydras Street, New Orleans, LA (herein "Buyer"); WHEREAS, on this date Great Lakes Compression, Inc. and the Seller have entered into an agreement dated as of January 1, 2001 (the "Purchase Agreement"), for purchase by Seller of substantially all the compression business assets of Great Lakes Compression, Inc., and WHEREAS, Buyer, an affiliate of Great Lakes Compression Inc., is in the business of oil and gas exploration, production and transportation, and in the course of that business Buyer from time to time has the need to purchase or lease various compressor units, and WHEREAS, Seller has required in the Purchase Agreement a commitment from Buyer for the future purchase or lease of compressor units (herein "Equipment") totaling five thousand horsepower (5,000 hp) for the period commencing on January 1, 2001 (herein "Effective Date"), and ending December 31, 2005, and WHEREAS, Seller and Buyer wish to further define such commitment for future purchase or lease of such compressor units, NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt of which is hereby confirmed, the parties agree as follows: 1. During the period commencing on the Effective Date and ending December 31, 2005, Buyer shall be obligated to place orders for future purchase or lease of Equipment totaling five thousand horsepower (5,000 hp). The number of compressor units and the size and type of each compressor unit shall be determined solely by Buyer. The decision whether to purchase or to lease shall be at Buyer's sole discretion; provided, however, Buyer shall not, without Seller's consent, order any Equipment other than rotary compressor units, each of not more than 500 horsepower. Buyer agrees that no more than thirty percent (30%) of the Equipment shall be purchased and that seventy percent (70%) (or more at Buyer's option) shall be leased. Buyer shall be required to order Equipment either for purchase or lease totaling not less than 800 horsepower and not more than 1300 horsepower during each calendar year that this Agreement is in force. 2. All purchases of Equipment by Buyer from Seller in satisfaction of this commitment shall be in accordance with the terms and conditions of this Agreement as well as that Gas Compressor Equipment Master Purchase Contract set forth in Exhibit A attached hereto and made a part hereof, and will specify the type of compressor unit, its horsepower and the time and place of delivery. 3. All leases of Equipment by Buyer from Seller in satisfaction of this commitment shall be in accordance with the terms and conditions of this Agreement as well as the Standard Gas Compressor Equipment Master Rental and Servicing Agreement set forth in Exhibit 13(d)(3) of the Purchase Agreement, and will specify the type of compressor unit, its horsepower and the time and place of delivery. 4. Buyer's obligation to purchase or lease such Equipment is conditioned upon Seller's ability to deliver to Buyer the types of compressor units required by Buyer, in its sole discretion (subject to the restrictions stated in paragraph I above), in the exercise of its business in oil and gas exploration, production and transportation. If the Seller is unable or unwilling to commit to deliver the required Equipment within 150 days of Buyer's request, or later if pursuant to a mutually acceptable equipment quotation, Buyer shall be free to, acquire or lease the requested Equipment from any other source available to it and that Equipment acquired or leased from that other source shall be regarded as Equipment acquired or leased by Buyer from Seller in satisfaction of this Agreement. Buyer's obligation to buy or lease such Equipment is also conditioned on Seller's pricing being competitive. If Buyer can purchase or lease comparable Equipment from a competitor of Seller for less than ninety-five percent (95%) of the price or rental rate quoted by Seller, Buyer shall be free to purchase or lease that Equipment from the competitor unless Seller is willing to meet the competitor's price or rental rate; provided however, that in the case of a lease rather than a purchase, the competition from whom Buyer is entitled hereby to lease must be a company that at the time Buyer seeks its quote is providing rental compressor equipment in the Northern Michigan Antrim Shale development area. If Buyer purchases or leases that Equipment from Seller's competitor as herein provided, that purchase or lease shall be regarded as a purchase or lease from Seller in satisfaction of Buyer's obligation under this Agreement. 5. For the purposes of satisfying Buyer's commitment under this Agreement, purchases or leases may be made not only by Buyer but also by any other companies under Buyer's direction and control and by subsidiaries or affiliates of Buyer. For any such purchase or lease by any such party other than Buyer, Buyer shall specifically notify Seller in writing that the purchase or lease is to be considered part of Buyer's commitment under this Agreement. All such purchases and leases of compressor units shall be for the use of Buyer or Buyer's subsidiaries or affiliates, and shall not be sold or leased to others except as provided in the Purchase Agreement. 6. If the Buyer is delayed at any time in its order to purchase or lease compressor units under the terms of the commitment set forth above, by causes beyond Buyer's reasonable control, such as by strike, lockout, fire or act of God, then the time for completion of the commitment of units totaling 5,000 hp shall be extended for such reasonable time as Seller and Buyer agree may be required due to such cause or causes. 7. If Seller believes that Buyer has not complied with all its obligations hereunder, both express and implied, Seller shall give written notice to Buyer specifically describing Buyer's non-compliance. Buyer shall have 90 days from receipt of such notice to commence, and shall thereafter pursue with reasonable diligence, such action as may be necessary or proper to satisfy such obligation of Buyer, if any, with respect to Seller's notice. Neither the service of said notice nor the doing of any acts by Buyer in response thereto shall be deemed an admission -2- or create a presumption that Buyer has failed to perform all its obligations hereunder. No judicial action may be commenced by Seller under this Agreement until after said 90-day period. 8. Any written notice provided or permitted to be given under this Agreement may be served by personal delivery or by registered or certified U.S. mail, addressed to the party to be notified, postage prepaid, return receipt requested. Notice deposited in the mail in any manner herein above described shall be deemed to have been given and received on the date of delivery as shown on the return receipt. Written notice may also be given by Federal Express or other nationally recognized courier service and shall be deemed to have been given and received on the date of delivery to the address by such service. Written notice served in any other manner (including by facsimile delivery) shall be deemed to have been given and received only if and when actually received by the addressee. For the purpose of notice, the addresses of the parties shall be as follows: SELLER: Natural Gas Acquisition Corporation 2911 SCR 1260 Midland, Texas 79706 Attention: Wallace C. Sparkman Telephone: (915) 563-3974 Fax: (915) 563-5567 BUYER: Dominion Exploration & Production, Inc. c/o Dominion Midwest Energy, Inc. 226 East 16th Street Traverse City, Michigan 49684 Attention: Ray Barnhart Telephone: (231) 922-7302 Fax: (231) 922-0892 9. This Agreement, including without limitation, its interpretation, validity, construction, breach, and enforcement, and the rights and obligations of the Parties hereunder, shall be governed exclusively by the law of the State of Michigan (excluding any conflicts of law rules which might apply or refer the matter to the law of another jurisdiction). Venue of any, lawsuit arising from or in connection with the terms of this Agreement shall be in Grand Traverse County, Michigan. The parties waive their rights to a jury trial. 10. Buyer shall have no further obligations under this Agreement if the underlying transaction between Great Lakes Compression, Inc. and Seller is not closed in accordance with the terms of the referenced Purchase Agreement, or if the rights under this Agreement are assigned or otherwise transferred by Seller without the written consent of Buyer. 11. This Agreement shall be binding on the successors and assigns of the parties hereto. -3- The parties have executed this Agreement as of the day and year set forth above. Seller: NATURAL GAS ACQUISITION CORPORATION By --------------------------------- Its --------------------------------- Buyer: DOMINION EXPLORATION & PRODUCTION, INC. By --------------------------------- Its ---------------------------------- -4- COMMITMENT AGREEMENT EXHIBIT A GAS COMPRESSOR EQUIPMENT MASTER PURCHASE CONTRACT This Gas Compressor Equipment Master Purchase Contract ("Agreement") is made between NATURAL GAS ACQUISITION CORPORATION, a Colorado corporation, hereinafter called "Seller", and DOMINION EXPLORATION & PRODUCTION, INC., a Michigan corporation, hereinafter called "Buyer." For and in consideration of the mutual covenants and agreements contain e4 herein and of the purchase of personal property hereinafter referred to, Seller and Buyer agree as follows: 1. PURCHASE. Subject to and on the terms and conditions herein set forth, Seller hereby agrees to sell to Buyer, and Buyer hereby agrees to purchase from Seller, the personal property (herein individually and collectively called the "Equipment"), described on the Equipment Purchase Schedule(s) executed and delivered by Buyer to Seller from time to time hereunder upon agreement of Seller and Buyer (the "Schedule" or "Schedules"), which shall be in the form attached hereto as Schedule A. Upon execution and delivery, each Schedule and the provisions thereof shall become parts hereof. Equipment purchase Schedule A has been executed concurrently herewith and additional Schedules may be executed as provided herein. 2. PRICE AND PAYMENT TERMS. Each Schedule shall set forth the price and the number and amount of payments for the Equipment listed thereon and payments for other products or services relating to such Equipment and the security deposit for such Equipment, which Buyer shall pay as so set forth. If Buyer fails to pay any sum when due, Buyer also shall pay to Seller interest thereon from the due date thereof to the date of payment at a rate equal to the Seller of (a) 18% per annum, or (b) the maximum rate permitted by applicable law. All payments by Buyer hereunder shall be payable at the office of Seller set forth below, or at such other place as Seller from time to time may designate in writing. The price and payment terms shall be those stated in the attached Schedules. 3. TAXES. Buyer shall be responsible for all license fees and assessments, and all sales, use, property, excise and other taxes or charges (including any interest and penalties), hereafter imposed by any governmental body or agency upon the Equipment or the purchase and ownership thereof. 4. DELIVERY. Time is of the essence for delivery of the Equipment. If delivery is not made within thirty (30) days of the date agreed upon, Buyer reserves the right to cancel or to purchase elsewhere, and in that case the purchase by Buyer from another supplier shall apply to Buyer's commitment to Seller under that certain Commitment Agreement of even date herewith between Seller and Buyer. 5. INSPECTION AND ACCEPTANCE. Buyer agrees to bear all of the cost of connecting the Equipment. Within 72 hours after start up of the Equipment to be purchased by the Buyer under each Schedule, Buyer shall inspect the Equipment. Unless within said 72 hour period Buyer notifies Seller in writing to the contrary stating the details of any defects, Buyer shall be conclusively presumed to have accepted the Equipment in its then condition. If within Exhibit A--Page 1 said 72-hour period Buyer notifies Seller in writing of the unacceptability of the Equipment, then at Buyer's option, the Equipment shall be repaired by Seller or shall be considered rejected by Buyer and returned or held at Seller's expense and risk, and Buyer's obligation to purchase the Equipment shall cease forthwith. Buyer may charge to Seller all expense of inspecting, unpacking, examining, repacking, storing and reshipping any Equipment rejected as aforesaid. These remedies for Buyer shall not be exclusive. Upon acceptance of delivery, Buyer assumes the care, custody, supervision, and control of the Equipment and of any and all persons or property in the vicinity of the Equipment during time of delivery, operation, and return. 6. FREIGHT. Cost of transporting the Equipment from the Seller's yard to Buyer's location described on the Schedule will be at the expense of Buyer, unless the Equipment is rejected by Buyer under the preceding paragraph. 7. USE. Buyer agrees to use the Equipment in a careful and prudent manner with competent agents, employees, or subcontractors only for the compression of gas in accordance with the specifications of the manufacturer of the Equipment. 8. INDEMNITY OF BUYER. Seller agrees to and shall indemnify and hold harmless Buyer, its officers, agents and employees, and its affiliated companies, from and against any and all claims, losses, damages, causes of action, suits and liabilities of every kind, including all expenses of litigation, court costs and attorney's fees, for injury to or death of any person, or for damage to any property, arising out of or in connection with the delivery, installation, operation, use, maintenance, repair, condition or removal of the equipment when and to the extent that the claims, losses, damages, causes of action, suits or liabilities arise from the sole or concurrent negligence of Seller, its employees or agents. Seller further agrees to and shall indemnify and hold harmless Buyer, its officers, agents and employees, and its affiliated companies, from and against any and all claims, losses, damages, causes of action, suits and liabilities of every kind, including all expenses of litigation, court costs and attorney's fees, for injury to or death of any person, or for damage to any property, arising out of or in connection with defectiveness of the equipment. Such indemnify shall apply whether such defect and the injury, death or damage result in whole or in part from the design, manufacture or distribution of the equipment or from the failure by Seller to warn any person of such defect. The above indemnities apply except when and to the extent that such claims, losses, damages, causes of action, suits and liabilities of every kind result from the negligence of Buyer, its employees or agents. 9. INDEMNITY OF SELLER. Buyer agrees to and shall indemnify and hold harmless Seller, its officers, agents and employees, and its affiliated companies, from and against any and all claims, losses, damages, causes of action, suits and liabilities of every kind, including all expenses of litigation, court costs and attorney's fees, for injury to or death of any person, or for damage to any property, arising out of or in connection with the delivery, installation, operation, use, maintenance, repair, condition or removal of the equipment when and to the extent that the claims, losses, damages, causes of action, suits or liabilities arise in whole or in part from the sole or concurrent negligence of Buyer, its employees or agents. The above indemnities apply except when and to the extent that such claims, losses, damages, causes of action, suits and liabilities of every kind result from the negligence of Seller, its employees or agents. Exhibit A--Page 2 10. ASSIGNMENT. Neither Seller nor Buyer may assign its rights or delegate its duties under this Agreement except with the written consent of Buyer and Seller respectively. 11. ENFORCEABILITY. If any part hereof is contrary to, prohibited by, or deemed invalid under applicable laws or regulations of any jurisdiction, such provision shall be inapplicable and deemed omitted but shall not invalidate the remaining provisions hereof. Buyer admits the receipt of a true copy of this Agreement. 12. MISCELLANEOUS (a) No covenant or condition of this Agreement can be waived or changed except by written consent of Seller and of Buyer. Forbearance by either party in any regard whatsoever shall not constitute a waiver or change of the covenant or condition to be performed by the other party to which the same may apply, and until complete performance by that other party of said covenant or condition, the forbearing party shall be entitled to invoke any remedy available to it under this Agreement or by law or equity despite said forbearance. Waiver of any default shall not waive any other default. (b) Any written notice provided or permitted to be given or permitted to be given under this Agreement may be served by personal delivery or by registered or certified U.S. mail, addressed to the Party to be notified, postage prepaid, return receipt requested. Notice deposited in the mail in any manner herein above described shall be deemed to have been given and received on the date of the delivery as shown on the return receipt. Written notice may also be given by Federal Express or other nationally recognized courier service and shall be deemed to have been given and received on the date of delivery to the address by such service. Written notice served in any other manner (including by facsimile delivery) shall be deemed to have been given and received only if and when actually received by the addressee. For the purposes of notice, the addresses of the Parties shall be as follows: SELLER: Natural Gas Acquisition Corporation 2911 SCR 1260 Midland, Texas 79706 Attention: Scott Sparkman Telephone: (915) 563-3974 Fax: (915) 563-5567 BUYER: Dominion Exploration & Production, Inc. c/o Dominion Midwest Energy, Inc. 226 East 16th Street Traverse City, Michigan 49684 Attention: Ray Barnhart Telephone: (231) 922-7302 Fax: (231) 922-0892 Exhibit A--Page 3 Each Party shall have the right, upon giving three days prior notice to the other in the manner herein above provided, to change its address for the purposes of notice to any other street address or telephone or fax number. (a) "Seller" and "Buyer" as used in this Agreement shall include the heirs, executors, administrators, successors, and/or assigns of such parties. (b) If more than one Buyer executes this Agreement, their obligations under this Agreement shall be joint and several. (c) This Agreement, including without limitation, its interpretation, validity, construction, breach, and enforcement, and the rights and obligations of the Parties hereunder, shall be governed exclusively by the law of the State of Michigan (excluding any conflicts of law rules which might apply or refer the matter to the law of another jurisdiction). (d) Seller and Buyer agree that venue of any lawsuit arising from or in connection with the terms of this Agreement shall be in Grand Traverse County, Michigan. The parties waive their rights to a jury trial. (e) This Agreement contains the full agreement between the parties. No representation or promise has been made by either party to the other as an inducement to enter into this Agreement. Seller does not in any way or for any purposes become a partner of Buyer, or a joint venturer, or, a member of a joint enterprise with Buyer. 13. WARRANTY. Seller warrants all Seller manufactured components for a period of one year from the date of delivery against defects in material and workmanship under normal operating conditions. Components manufactured by another manufacturer will be warranted for one year or the limit of the other manufacturer's warranty, whichever is less. Seller be obligated under this warranty, but limited to repairing or furnishing without charge, FOB to the point of manufacture, a similar part, to replace any part manufactured by it and which is proven to be defective. 14. This agreement is made subject to the terms and conditions of that certain Commitment Agreement between the parties and effective January 1, 2001. 15. OTHER CONDITIONS OR OPTIONS. --------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ---------------------------------------. Executed this 21st day of March, 2001. Exhibit A--Page 4 Seller: WITNESS: NATURAL GAS ACQUISITION CORPORATION By - ------------------------ --------------------------------- Its -------------------------------- Address: ---------------------------- ---------------------------- Buyer: WITNESS: DOMINION EXPLORATION & PRODUCTION, INC. By - ------------------------ --------------------------------- Its -------------------------------- Address: ---------------------------- ---------------------------- Exhibit A--Page 5 SCHEDULE A STANDARD GAS COMPRESSOR EQUIPMENT MASTER PURCHASE CONTRACT Where executed by Seller and Buyer, this Schedule A shall apply to the' Standard Gas Compressor Equipment Master Purchase Contract executed by Buyer dated as of March 21, 2001 (the "Master Agreement"); and upon execution, this Schedule A shall be incorporated as a part of the Master Agreement whether or not attached thereto, and shall be deemed an individual agreement between the parties for the Equipment described herein, upon the terms and conditions stated herein and in the Master Agreement. The State of Michigan Unit No. County of Montmorency This Purchase Agreement made this day of __________, 20___, between ________________, hereinafter called "Seller", and ______________________, hereinafter called "Buyer", Seller in consideration of the payment of the purchase price hereinafter set out; hereby sells to Buyer and Buyer buys from Seller the following described personal property, hereinafter referred to as "Equipment": I. Equipment Description: II. Location Description--for use on Buyer's Lease: Seller represents and warrants that the Equipment will satisfy the following design operating conditions: Design Alternate 1 2 3 4 Suction Pressure-PSIG ---------------------- Suction Temperature-Deg. F ---------------------- Discharge Pressure-PSIG ---------------------- Volume-MSCFD ---------------------- BHP ---------------------- "K" Value Specific Gravity -------- H2S Content %O Type Gas 1000 Btu Unit Speed-RPM Elevation ------ -------- Ambient Temp.-Deg. F ------ III. The Purchase Price of the Equipment is $ . ---------- IV. The Equipment shall be delivered on , 200 . ---------- -- ASSET PURCHASE AGREEMENT EXHIBIT 13(d)(3) STANDARD GAS COMPRESSOR EQUIPMENT MASTER RENTAL AND SERVICING AGREEMENT RENTAL AGREEMENT NO. ____________________ This Standard Gas Compressor Equipment Master Rental and Servicing Agreement ("Agreement") is made between Natural Gas Acquisition Corporation, a Colorado corporation, hereinafter called "LESSOR", and Dominion Exploration & Production, Inc., a Michigan corporation, hereinafter called "LESSEE". For and in consideration of the mutual covenants and agreements contained herein and of the lease of personal property hereinafter referred to, LESSOR and LESSEE agree as follows: 1. Lease. Subject to and on the terms and conditions herein set forth, LESSOR hereby agrees to lease to LESSEE, and LESSEE hereby agrees to lease from LESSOR, the personal property (herein individually and collectively called the "Equipment") described on the Equipment Lease Schedule(s)executed and delivered by LESSEE to LESSOR from time to time hereunder upon agreement of LESSOR and LESSEE (the "Schedule" or "Schedules"), which shall be in the form attached hereto as Schedule A. Upon execution and delivery, each Schedule and the provisions thereof shall become parts hereof. Equipment lease Schedule A has been executed concurrently herewith and additional Schedules may be executed as provided herein. 2. Term and Rent. Each Schedule shall set forth the term of the lease and the number and amount of rental payments for the Equipment listed thereon, contract maintenance and other products or services relating to such Equipment and the security deposit for such Equipment, which LESSEE shall pay as so set forth. If LESSEE fails to pay any rental or other sum when due, LESSEE also shall pay to LESSOR interest thereon from the date thereof to the date of payment at a rate equal to the lesser of (a) 18% per annum, or (b) the maximum rate permitted by applicable law. All payments by LESSEE hereunder shall be payable at the office of LESSOR set forth below, or at such other place as LESSOR from time to time may designate in writing. LESSEE agrees that all rental payments and other sums payable by LESSEE hereunder shall be the unconditional obligation of LESSEE and shall be made without abatement, reduction or set off of any nature, including any thereof arising out of any present or future claim LESSEE may have against LESSOR or any of its assignees or the manufacturer or vendor of the Equipment, except as provided herein. 3. Taxes. LESSEE agrees to pay, promptly when due, all license fees and assessments, and all sales, use, property, excise and other taxes or charges (including any interest and penalties), now or hereafter imposed by any governmental body or agency upon any Equipment or the purchase, ownership, possession, leasing, operation, use, or disposition thereof, hereunder, or the rentals or other payments hereunder (excluding taxes on or measured by the net income of LESSOR) and prepare and file promptly with the appropriate offices any and all tax and other similar returns required to be filed with respect thereto (sending copies thereof to LESSOR) or, if requested by LESSOR, notify LESSOR of such requirement and furnish LESSOR with all information required by LESSOR so that it may effect such filing. If LESSEE does not promptly pay when due any sum pursuant to this paragraph 3, LESSOR has the right but not the obligation to make any such payments on LESSEE's behalf, and any such amounts paid by LESSOR will be immediately due and payable by LESSEE to LESSOR upon LESSEE's receipt of demand for payment by LESSOR. 4. Inspection and Acceptance. LESSEE shall have 48 hours before the delivery of the Equipment to LESSEE to make its initial inspection of the Equipment. Unless within said 4 8 hour period LESSEE notifies LESSOR in writing that the Equipment is defective or fails to meet specifications, the term of this lease and the rental payment obligation shall commence at the end of the initial inspection period. Within 72 hours after start up of the Equipment leased to LESSEE under each Schedule, LESSEE shall further inspect the Equipment. Unless within said 72-hour period LESSEE notifies LESSOR in writing to the contrary stating the details of any defects, LESSEE shall be conclusively presumed to have accepted the Equipment in its then condition. If within said 72-hour period LESSEE notifies LESSOR in writing of the unacceptability of the Equipment, LESSOR shall have the option to repair the defect, provide a replacement unit within a commercially reasonable period of time or terminate LESSOR's obligations to lease the Equipment. If LESSEE notifies LESSOR of the unacceptability of the Equipment within the 72- hour period, no rent shall be due for the period subsequent to the LESSEE's notification of unacceptability until such time as the defect is repaired or the defective Equipment is replaced. Upon acceptance of delivery, LESSEE assumes the care, custody, supervision and control of the Equipment and of any and all persons or property in the vicinity of the Equipment during time of delivery, operation and return. 5. Freight. LESSEE agrees to bear all of the cost of connecting the Equipment and of disconnecting the Equipment prior to returning the Equipment to LESSOR. The cost of transporting the Equipment from LESSOR's yard to LESSEE's location described on the Schedule will be at the expense of LESSEE. Transporting the Equipment from LESSEE's location back to LESSOR's yard will be at the expense of LESSEE unless the Equipment is rejected. The costs provided for in this Paragraph 5 shall be paid by LESSEE, on or before the first day of the month following connection, disconnection or transport. 6. Insurance. LESSEE shall, at LESSEE's sole cost and expense, maintain insurance or self-insure in such amounts, against such risks (including, without limitation, all risk and public liability insurance with respect to the Equipment), with such carriers and in such form as shall be reasonably satisfactory to LESSOR naming LESSEE as an insured and LESSOR as an additional insured. LESSEE shall provide LESSOR with evidence of such insurance or adequacy of self-insurance prior to the delivery of the equipment to LESSEE by LESSOR. The policies for such insurance shall provide that LESSOR shall receive 30 days notice of any termination, cancellation or alteration of the terms of such insurance and shall provide that the coverage afforded to LESSOR shall not be rescinded, impaired or invalidated by any act or neglect of LESSEE. Exhibit A--Page 2 LESSOR, at its sole cost and expense (and with deductibles for its own account) shall procure and shall at all times during the term of the Agreement, and during the performance of work hereunder, maintain in force with insurance companies which maintain a Bests Rating of A-VII or better, and are authorized to do business in the state or states in which services are to be performed by LESSOR, the types and minimum amounts of insurance as shown in Schedule C hereto. Prior to the commencement of work or services hereunder, LESSOR shall furnish LESSEE with Certificates of Insurance evidencing the coverage and conditions required by this Agreement and Schedule C. LESSOR shall contractually require, and shall cause all subcontractors performing work in this Agreement to comply with the provisions of this Section 6 such that all subcontractors shall owe to LESSEE the same duties respecting insurance as are owed by LESSOR. 7. Use. LESSEE agrees to use the Equipment in a careful and prudent manner with competent agents, employees or subcontractors only for the compression of gas in accordance with the specifications of the manufacturer of the Equipment. LESSEE shall submit to LESSOR monthly operating reports to evidence same. LESSEE agrees to pay for damages to the Equipment resulting from free water, excessive condensate or foreign solids, or impurities contained in the gas stream. LESSEE further agrees to pay for all damages to the Equipment resulting from abusive use, failure to maintain the Equipment in accordance with this Agreement, or from any negligence on part of LESSEE, it's agents, employees or subcontractors. 8. Maintenance. Except as otherwise provided herein, LESSOR agrees at LESSOR's own expense to make all repairs and replacements necessary to maintain, preserve and keep the Equipment in good order and condition. To facilitate the maintenance obligations of LESSOR hereunder, LESSEE shall (a) provide LESSOR with reasonable access to the Equipment and all necessary items to perform its duties hereunder, (b) provide, if required to protect the compressor, an inlet separator and filtration for the Equipment to remove solids (such as sand, salt, paraffin) and all entrained liquids from the gas stream (LESSEE hereby acknowledging that the scrubber provided by LESSOR with the Equipment is only an emergency scrubber), (c) start and stop the Equipment as requested from time to time, (d) fill oil and coolant reservoirs in the Equipment as needed, (e) stop leaks of oil or coolant from the Equipment and promptly report such leaks to LESSOR and (f) furnish free use of suitable natural gas fuel for engine use. 9. Inspection. LESSOR shall have the right at all times to enter upon the premises where the Equipment may be located for the purpose of inspecting it or observing its use. 10. Title; Personal Property; Encumbrances; Location. LESSEE covenants that the ownership of the Equipment is and at all times shall remain in LESSOR and that the Equipment is and shall remain personal property and shall not be attached to or become part of any realty; that it shall be installed and used at the location specified in the Schedule pertaining thereto and that it shall not be removed therefrom, and that LESSEE will not sell, secrete, mortgage, assign, transfer, lease, sublet, loan, part with possession of, or encumber the Equipment or permit any liens or charges to become effective thereon or permit or attempt to do any of the acts aforesaid. LESSEE agrees, at LESSEE's own expense, to take such action as may be necessary (a) to remove any such encumbrance, lien or charge and (b) to prevent any third party from acquiring any other interest in any Equipment (including, without limitation, by reason of such Equipment Exhibit A--Page 3 being deemed to be a fixture or a part of any realty). LESSEE will not change or remove any insignia, serial number or lettering on the Equipment and shall conspicuously identify each item of the Equipment by suitable lettering thereon to indicate LESSOR's ownership thereof. 11. Events of default; Remedies; Expenses. In the event that LESSEE shall default in the payment of any installment of rent or other sum payable hereunder or under any Schedule when due or default in the observance or performance of any other covenant or agreement of this Agreement or under any Schedule; then LESSOR may, by written notice to LESSEE (to the extent legally permitted to do so) proceed by appropriate court action or actions either at law or in equity, to enforce performance by LESSEE of the applicable covenants of this Agreement or to recover damages for the breach thereof. 12. Holding Over. Any holding over after the expiration of the initial term shall be on a month-to-month basis and shall be on the same terms and conditions as the last month of such initial term, except that LESSOR, in its sole discretion, may increase the monthly rental payments of the Equipment for any such holding over by giving LESSEE 30 days written notice of same, but only to the extent that the rental does not exceed what LESSOR would charge at that time, on average, to other customers for a 60 month lease of comparable equipment. Any holding after the expiration of the initial term may be terminated by either party by giving the other party 30 days written notice of same. The other terms and conditions of this Agreement shall remain in full force and effect until the Equipment is returned to LESSOR. 13. Indemnity of LESSEE. LESSOR agrees to and shall indemnify and hold harmless LESSEE, its officers, agents and employees, from and against any and all claims, losses, damages, cause of action, suits and liabilities of every kind, including all expenses of litigation, court costs and attorney's fees, for injury to or death of any person, or for damage to any property, arising out of or in connection with the delivery, installation, operation, use, maintenance, repair, condition or removal of the equipment where the claims, losses, damages, causes of action, suits or liabilities arise in whole or in part from the sole or concurrent negligence of LESSOR, its employees or agents. LESSOR further agrees to and shall indemnify and hold harmless LESSEE, its officers, agents and employees, from and against any and all claims, losses, damages, causes of action, suits and liabilities of every kind, including all expenses of litigation, court costs and attorney's fees, for injury to or death of any person, or for damage to any property, arising out of or in connection with defectiveness of the equipment. The above indemnities apply except when and to the extent that such claims, losses, damages, causes of action, suits and liabilities of every kind, result from the negligence of LESSEE, its employees or agents. 14. Indemnity of LESSOR. LESSEE agrees to and shall indemnify and hold harmless LESSOR, its officers, agents, employees, and its affiliated companies, from and against any and all claims, losses, damages, causes of action, suits and liabilities of every kind, including all expenses of litigation, court costs and attorney's fees, for injury to or death of any person, or for damage to any property, arising out of or in connection with the delivery, installation, operation, use, maintenance, repair, condition or removal of the equipment where the claims, losses, damages, causes of action, suits or liabilities arise in whole or in part from the sole or concurrent negligence of LESSEE, its employees or agents. The above indemnities apply except Exhibit A--Page 4 when and to the extent that such claims, losses, damages, causes of action; suits and liabilities of every kind result from the negligence of LESSOR, As employees or agents. LESSOR shall have no liability for, and LESSEE shall defend and indemnify LESSOR against, any and all liability arising out of or due to, or allegedly arising out of or due to, (i) the release on, under or from LESSEE's property of any hazardous substances; (ii) any contamination of LESSEE's property, including without limitation, the presence of any hazardous substance which has come to be located on or under LESSEE's property from another location; (iii) any violation or alleged violation of any environmental law with respect to LESSEE's property or business, (iv) any injury to human health or safety or to the environment by reason of the past or present condition or, or past or present activities on or under, LESSEE's property, or (v) the generation, manufacture, storage, treatment, handling, transpiration, or other use, however defined, or any hazardous substance on LESSEE's property, unless such liability is caused in whole or in part by performance of services by LESSOR and its employees or agents pursuant to this Agreement, defects in the Equipment, or defects not caused by LESSEE, its employees or agents. 15. Lost Production. LESSEE agrees to and shall release LESSOR, its officers, agents and employees, from and against any and all claims by LESSEE for forfeiture of an oil, gas or mineral lease, for damage to a producing reservoir or lease operations or for lost production, arising from or in connection with the failure of the operation of the Equipment for any reason whatsoever, or losses or damages related thereto. Such release shall apply where the claims, losses, damages, causes of action, suits or liabilities arise in whole or in part from the sole or concurrent negligence of LESSOR in the defectiveness of the Equipment. Furthermore, if such claims, losses and damages arise in whole or in part from the defectiveness of the equipment, such release shall apply whether such defect and failure of the equipment result in whole or in part from the design, manufacture, marketing or distribution of the Equipment or from the failure of LESSOR to warn any person of any such defect. 16. No Assignment by LESSOR. Neither this Agreement nor LESS OR's right hereunder shall be assigned by LESSOR except with LESSEE's prior written consent upon not less than 15 days prior written request from LESSOR identifying the proposed assignee. The conditions hereof shall bind any permitted successors and assigns of LESSOR. 17. No Assignment by LESSEE. Neither this Agreement nor LESSEE's right hereunder shall be assigned by LESSEE except with LESSOR's prior written consent upon not less than 15 days prior written request from LESSEE identifying the proposed assignee. The conditions hereof shall bind any permitted successors and assigns of LESSEE. 18. Quiet Enjoyment. Conditioned upon LESSEE's performing the conditions hereof, LESSEE shall peaceably and quietly hold, possess and use the Equipment during said term without hindrance. 19. Representations: LESSEE agrees and affirms that: (a) information supplied and statements made by it in any financial or credit statement or application for credit prior to this Agreement are true and correct; Exhibit A--Page 5 (b) no financing statement which could be construed to cover the Equipment, is on file in any public office and there is no adverse lien, security interest or encumbrances created by LESSEE which can attach to the Equipment; and (c) THERE ARE NO EXPRESS WARRANTIES WITH RESPECT TO THE EQUIPMENT UNLESS THEY APPEAR IN WRITING SIGNED BY LESSOR AND THERE ARE NO IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE IN CONNECTION WITH THE LEASE OF THE EQUIPMENT WHICH EXTEND BEYOND THE FACE HEREOF. 20. Enforceability and Irrevocability. If any part hereof is contrary to, prohibited by or deemed invalid under applicable laws or regulations of any jurisdiction, such provision shall be inapplicable and deemed omitted but shall not invalidate the remaining provisions hereof. LESSEE admits the receipt of a true copy of this Agreement. This Agreement is irrevocable for the full term hereof and for the aggregate rental herein reserved, and the rent shall not abate by reason of termination of LESSEE's right of possession and/or the taking of possession by LESSOR or for any other reason. 21. No Conditional Sale. It is the intention of the parties hereto to hereby create a lease on the Equipment described herein, and not a conditional sale. To provide solely for the eventuality that a court might hold this to be a conditional sale, LESSOR hereby retains a purchase money security interest to secure payment of the sales price of the Equipment as determined by such court, and LESSEE grants to LESSOR all rights given to a secured party under the Uniform Commercial Code in addition to LESSOR's other rights hereunder. It is the intention of the parties that the Equipment shall be deemed personal property and that it not be deemed a fixture, even though it may be attached in some manner to realty. To provide solely for the eventuality that a court might also hold the Equipment to be a fixture, the parties state for the purpose of complying with the legal requirements for a financing statement that collateral is or includes fixtures and the Equipment is affixed or is to be affixed to the lands described in the Schedule. 22. Miscellaneous: (a) No covenant of this Agreement can be waived or changed except by the written consent of LESSOR. Forbearance or indulgence by LESSOR in any regard whatsoever shall not constitute a waiver or change of the covenant or condition to be performed by LESSEE to which the same may apply, and, until complete performance by LESSEE of said covenant or condition, LESSOR shall be entitled to invoke any remedy available to LESSOR under this Agreement or by law or equity despite said forbearance or indulgence. Waiver by LESSOR of any LESSEE default shall not waive any other LESSEE default. No covenant of this Agreement can be waived or changed except by the written consent of LESSEE. Forbearance or indulgence by LESSEE in any regard whatsoever shall not constitute a waiver or change of the covenant or condition to be performed by LESSOR to which the same may apply, and, until, complete performance by LESSOR of said covenant or condition, LESSEE shall be entitled to invoke any remedy available to LESSEE under this Agreement or by law or equity despite said Exhibit A--Page 6 forbearance or indulgence. Waiver by LESSEE of any LESSOR default shall not waive any other LESSOR default; (b) Any written notice provided or permitted to be given under this Agreement may be served by personal delivery or by registered or certified U.S. mail, addressed to the party to be notified, postage prepaid, return receipt requested. Notice deposited in the mail in any manner herein above described shall be deemed to have been given and received on the date of delivery as shown on the return receipt. Written notice may also be given by Federal Express or other nationally recognized courier service and shall be deemed to have been given and received on the date of delivery to the address by such service. Written notice served in any other manner (including by facsimile delivery) shall be deemed to have been given and received only if and when actually received by the addressee. For the purpose of notice, the addresses of the parties shall be as follows: LESSOR: Natural Gas Acquisition Corporation 2911 SCR 1260 Midland, Texas 79706 Attention: Scott Sparkman Telephone: (915) 563-3974 Fax: (915) 563-5567 LESSEE: Dominion Exploration & Production, Inc. c/o Dominion Midwest Energy, Inc. 226 East 16th Street Traverse City, Michigan 49684 Attention: Ray Barnhart Telephone: (231) 922-7302 Fax: (231) 922-0892 (c) "LESSOR" and "LESSEE" as used in this Agreement shall include the heirs, executors, administrators, successors and/or assigns of such parties; (d) If more than one party executes this Agreement as LESSEE, their obligations under this Agreement shall be joint and several; (e) This Agreement, including without limitation, its interpretation, validity, construction, breach, and enforcement, and the rights and obligations of the Parties hereunder, shall be governed exclusively by the law of the State of Michigan (excluding any conflicts of law rules which might apply or refer the matter to the law of another jurisdiction). Exhibit A--Page 7 (f) LESSOR and LESSEE agree that jurisdictional venue of any lawsuit arising from or in connection with the terms of this Agreement shall be in Grand Traverse County, Michigan. Both parties waive the right to a jury trial; (g) No representation or promise has been made by either party to the other as an inducement to enter into this Agreement. LESSOR does not in any way or for any purposes become a partner of LESSEE, or a joint venture, or a member of a joint enterprise with LESSEE. 23. Maintenance Time and Mechanical Availability. (a) LESSOR represents that each compressor unit will provide 95% mechanical availability. LESSOR and LESSEE agree that 95% mechanical availability means the unit will not be mechanically unavailable more than 36 hours per month. Should LESSOR fail to provide 95% mechanical availability during any calendar month after the first thirty days of operation, LESSOR will reduce that month's invoice 1/684 for each 1 hour below 684 hours that a unit is not mechanically available for that calendar month (the "penalty"), provided that daily operating reports have been received by LESSOR each month in accordance with the contract terms. The penalty shall not begin to accrue until twelve (12) hours after LESSEE notifies LESSOR that unit is not mechanically available. Down-time for LESSEE's convenience or wellbore or pipeline shut-ins, the negligence of LESSEE or a breach of LESSEE's obligations hereunder, will be considered mechanically available time for the purpose of calculating monthly mechanical availability. (b) A request for credit with substantiation of downtime must be given to LESSOR in writing within fifteen days of the month in which percentage of mechanical availability was not made. The mechanical availability for the previous calendar month will be assumed to have been met unless otherwise notified. (c) Should LESSOR fail to provide the required percentage of mechanical availability for three consecutive months, a meeting shall be held between LESSOR and LESSEE to evaluate the reason(s) for failing to provide the required percentage of mechanical availability. If the reason(s) are found to be mechanical, LESSOR shall have an additional sixty days to provide the required percentage of mechanical availability after such meeting. If the reason(s) are found to be changes in the operating conditions as set forth in Schedule A, the LESSOR shall be deemed to have met its requirements under this section in providing the required percentage of mechanical availability. (d) Either party has the right to terminate this Agreement for a particular piece of Equipment at any time and upon thirty days written notice to the other party, should LESSOR fail to correct the reason(s) for not providing the required percentage of mechanical availability after the prescribed time periods and remedies. 24. Full Maintenance Terms. If the parties have agreed on a Schedule A that the rental of a piece of Equipment is to be on a full maintenance basis, the terms of Schedule B to this Agreement shall apply to that piece of Equipment. Exhibit A--Page 8 EXECUTED this 21st day of March, 2001. LESSOR: WITNESS: NATURAL GAS ACQUISITION CORPORATION By - --------------------- ------------------------------------- Its ------------------------------------- LESSEE: WITNESS: DOMINION EXPLORATION & PRODUCTION, INC. By - --------------------- ------------------------------------- Its ------------------------------------- Exhibit A--Page 9 EX-10.15 11 d96705a1exv10w15.txt AMENDMENT NO. 6 TO LOAN AGREEMENT EXHIBIT 10.15 SIXTH AMENDMENT TO LOAN AGREEMENT This Sixth Amendment to Loan Agreement (this "Amendment"), dated as of May 6, 2002, is made and entered into by and among Natural Gas Services Group, Inc., a Colorado corporation ("Borrower"), Wallace C. Sparkman, Wallace O. Sellers, CAV-RDV, LTD., Diamente Investments, L.P., Richard L. Yadon, Rotary Gas Systems, Inc., NGE Leasing, Inc. and Western National Bank, a national banking association ("Lender"). WITNESSETH: WHEREAS, Borrower and Lender entered into that certain Loan Agreement, dated as of September 15, 1999, as amended by that certain First Amendment and Waiver to Loan Agreement, dated as of March 9, 2001, as further amended by that certain Second Amendment to Loan Agreement, dated as of March 20, 2001, as further amended by that certain Third Amendment and Waiver to Loan Agreement, dated as of July 25, 2001, as further amended by that certain Fourth Amendment to Loan Agreement, dated as of December 12, 2001, and as further amended by that certain Fifth Amendment to Loan Agreement, dated as of April 3, 2002 (said Loan Agreement, as so amended, and as the same may be further amended, supplemented or otherwise modified from time to time, the "Agreement"), providing for, among other things, loans to Borrower evidenced by (i) that certain Revolving Line of Credit Promissory Note, dated April 3, 2002, in the original principal amount of $750,000.00, (ii) that certain Consolidated Term Promissory Note, dated April 3, 2002, in the original principal amount of $2,146,660.93, and (iii) that certain Multiple Advance Term Promissory Note, dated April 3, 2002, in the original principal amount of $1,853,340.00. WHEREAS, Borrower has requested that Lender waive for a period of six months the Borrower's compliance with Section 6.1(a) of the Agreement; WHEREAS, the Lender has agreed to Borrower's requests, but only upon and subject to the terms and provisions which are hereinafter specified. NOW THEREFORE, in consideration of the foregoing and the mutual covenants and agreements herein contained, and intending to be legally bound hereby, the parties hereto hereby agree as follows: SECTION 1. DEFINED TERMS. In addition to the terms defined in this Amendment, all terms defined in the Agreement, and not otherwise defined herein, shall have the meaning given them in the Agreement when used herein. SECTION 2. WAIVER. The Lender hereby waives Borrower's compliance with Section 6.1(a) of the Agreement until November 29, 2002. SECTION 3. AMENDMENT TO LOAN AGREEMENT. Section 6.1(a) of the Agreement is amended to read in full as follows: (a) Consolidated Current Ratio. Permit the Consolidated Current Ratio, as defined herein and calculated pursuant to Exhibit L hereto, to be less than 1.0 to 1.0 as of November 30, 2002 and as of the end of each month after November 30, 2002. SECTION 4. REPRESENTATIONS AND WARRANTIES. To induce Lender to enter into this Amendment, Borrower hereby represents and warrants to the Lender as follows: (a) Borrower has the corporate power, authority and legal right (i) to make and deliver this Amendment; and (ii) to perform its obligations under the Notes and the Agreement, as amended hereby; and Borrower has taken all action necessary to authorize the execution and delivery of this Amendment and the performance of the Agreement, as amended hereby. (b) This Amendment has been duly executed and delivered on behalf of Borrower by its duly authorized officer, and this Amendment constitutes the legal, valid and binding obligation of Borrower, enforceable in accordance with its terms, except as the enforceability thereof may be limited by applicable bankruptcy, reorganization, insolvency, moratorium or other laws affecting creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). -2- (c) The execution, delivery and performance by Borrower of this Amendment and the transactions contemplated hereby do not violate or constitute a default under any provision of applicable law or any agreement binding upon Borrower or the Subsidiaries of Borrower or result in the creation or imposition of any Lien upon any of the assets of Borrower or the Subsidiaries of Borrower, except Liens expressly permitted by the Agreement. (d) The representations and warranties contained in Article IV of the Agreement are true and correct on and as of the date hereof as though made on and as of the hereof. (e) No Event of Default has occurred and is continuing (after giving effect to this Amendment). SECTION 5. CONDITIONS PRECEDENT. This Amendment shall be effective only upon satisfaction of the following conditions precedent: (a) Lender shall have received counterparts of this Amendment duly executed and delivered by the Borrower and Guarantors; (b) No Event of Default shall have occurred and be continuing as of the date of this Amendment, both before and after giving effect to this Amendment; and (c) Lender shall have received such other agreements, documents or instruments as Lender may require. -3- SECTION 6. NO OTHER AMENDMENTS; RATIFICATION OF LOAN PAPERS. Except as expressly amended and modified by this Amendment, all of the provisions and covenants of the Agreement, all exhibits thereto and all other Loan Papers (as any of the same have been amended) are and shall continue to remain in full force and effect in accordance with the terms thereof and are hereby ratified and confirmed by Borrower, the Subsidiaries parties hereto and the Limited Guarantors as of the date of this Amendment as if the Agreement and such other Loan Papers were re-executed as of the date of this Amendment. SECTION 7. COUNTERPARTS. This Amendment may be executed by one or more of the parties hereto in any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. SECTION 8. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS. SECTION 9. GLOBAL AMENDMENT OF LOAN PAPERS. All of the Loan Papers are hereby modified wherever necessary, and even though not specifically addressed herein, so as to conform to the amendments to the Agreement as set forth herein, and Borrower, the Subsidiaries and Guarantors covenant to observe, comply with and perform each of the terms and provisions of the Loan Papers to which they are parties, as modified hereby. Each Loan Paper to which Borrower and the Subsidiaries or any Guarantor is a party is hereby amended so that any reference in each such Loan Paper to the Agreement shall mean a reference to the Agreement as amended hereby. -4- SECTION 10. FINAL AGREEMENT. THE AGREEMENT, AS AMENDED BY THIS AMENDMENT, AND THE OTHER LOAN PAPERS REPRESENTS THE ENTIRE AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS BETWEEN THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and delivered by their respective duly authorized officers as of the date and year first above written. BORROWER: NATURAL GAS SERVICES GROUP, INC. By: /s/ Wayne Vinson President LENDER: WESTERN NATIONAL BANK /s/ Scott A. Lovett, Executive Vice President -5- LIMITED GUARANTORS: /s/ Wallace O. Sellers, Individually CAV-RDV, LTD. /s/ Kirk Mehaffey, General Partner DIAMENTE INVESTMENTS, L.P. By: Diamente Management, LLC, its general partner /s/ Wallace C. Sparkman, President /s/ Wallace C. Sparkman, Individually /s/ Richard L. Yadon, Individually SUBSIDIARY GUARANTORS: ROTARY GAS SYSTEMS, INC. /s/ Wayne Vinson, President NGE LEASING, INC. /s/ Wallace C. Sparkman, President -6- EX-10.16 12 d96705a1exv10w16.txt CERTAIN EXHIBITS TO LOAN AGREEMENT EXHIBIT 10.16 SCHEDULE II The following indebtedness of the Borrower will be repaid in its entirety with proceeds of the Term Promissory Note: 1. C.N.G. Engines Company. Promissory Note, dated August 20, 1998, in the original principal amount of $350,000.00, made by C.N.G. Engines Company payable to NorwestBank Texas, N.A. and maturing on April 30, 1999, the outstanding principal balance and accrued interest of which on September 16, 1999 will be $319,790.79. 2. Flare King, Inc. Commercial Variable Rate Revolving or Draw Note, dated June 17, 1998, in the original principal amount of $125,000.00, made by Flare King, Inc. payable to Midland American Bank and maturing on June 17, 1999, the outstanding principal balance and accrued interest of which on September 16, 1999 will be $126,772.04. 3. Flare King, Inc. Commercial Revolving or Draw Note - Variable Rate, dated June 19, 1997, in the original principal amount of $150,000.00, made by Flare King, Inc. payable to Midland American Bank and maturing on June 19, 2000, the outstanding principal balance and accrued interest of which on September 16, 1999 will be $52,064.99. 4. Gas Engine Service, LLC. Term Promissory Note, dated July 9, 1996, in the original principal amount of $40,000.00 made by Gas Engine Service, LLC payable to Texas Commerce Bank National Association and maturing on July 15, 2000, the outstanding principal balance and accrued interest of which on September 16, 1999 will be $2,295.98. 5. Gas Engine Service, LLC. Revolving Promissory Note, dated July 23, 1998, in the original principal amount of $50,000.00, made by Gas Engine Service, LLC payable to Chase Bank of Texas, National Association and maturing on July 23, 1999, the outstanding principal balance and accrued interest of which on September 16, 1999 will be $49,132.41. 6. Natural Gas Engine Co. Promissory Note, dated May 24, 1999, in the original principal amount of $750,000.00, made by Natural Gas Engine Co. payable to Western National Bank and maturing on September 21, 1999, the outstanding principal balance and accrued interest of which on September 16, 1999 will be $752,927.09. EXHIBIT A TERM PROMISSORY NOTE $1,500,000.00 SEPTEMBER 15, 1999 FOR VALUE RECEIVED, in the manner, on the dates and in the amounts herein stipulated, NATURAL GAS SERVICES GROUP, INC., a Texas corporation ("Borrower"), hereby promises and agrees to pay to the order of WESTERN NATIONAL BANK, a national banking association ("Lender"), in Midland, Midland County, Texas, the principal sum of One Million Five Hundred Thousand and No/100 Dollars ($1,500,000.00)in lawful money of the United States of America, which shall be legal tender in payment of all debts and dues, public and private, at the time of payment, together with interest on the unpaid principal amount hereof from time to time outstanding until maturity at a rate per annum which shall from day to day be equal to the lesser of (a) one percent (1.00%) over the Prime Rate (the "Established Rate") in effect from day to day (calculated on the basis of actual days elapsed, but computed as if each calendar year consisted of 360 days) or (b) the Highest Lawful Rate. Each change in the rate of interest charged under this Term Promissory Note (this "Note") shall, subject to the terms hereof, become effective, without notice to Borrower, upon the effective date of each change in the Prime Rate or the Highest Lawful Rate, as the case may be. Notwithstanding the foregoing, if at any time the Established Rate exceeds the Highest Lawful Rate, the rate of interest on this Note shall be limited to the Highest Lawful Rate, but any subsequent reductions in the Established Rate shall not reduce the rate of interest hereon below the Highest Lawful Rate until the total amount of interest accrued hereon approximately equals the amount of interest which would have accrued hereon if the Established Rate had at all times been in effect. In the event that at maturity (stated or by acceleration), or at final payment of this Note, the total amount of interest paid or accrued hereon is less than the amount of interest which would have accrued if the Established Rate had at all times been in effect, then, at such time and to the extent permitted by applicable laws, Borrower shall pay to Lender an amount equal to the difference between (a) the lesser of the amount of interest which would have accrued if the Established Rate had at all times been in effect or the amount of interest which would have accrued if the Highest Lawful Rate had at all times been in effect, and (b) the amount of interest actually paid or accrued on this Note. Interest calculations may be made ten days prior to any interest installment due date under this Note, in which event, if there is an adjustment in the interest rate in accordance with the terms hereof during such ten-day period, then Borrower shall subsequently, on demand, pay to Lender any underpayment, or Lender shall pay to Borrower, any overpayment, as the case may be, as a result of any adjustment during such ten-day period. This Note is the Term Promissory Note referred to in the Loan Agreement, dated as of the date hereof (as the same may be amended, supplemented or otherwise modified from time to time, the "Loan Agreement"), by and between Borrower and Lender, and is subject to the terms and conditions thereof. Reference is made to the Loan Agreement for provisions for the disbursement of funds hereunder and for a further statement of the rights, remedies, powers, privileges, benefits, duties and obligations of Borrower and Lender under the Loan Agreement and this Note. Terms used herein which are defined in the Loan Agreement shall have such defined meanings unless otherwise defined herein. The holder of this Note shall be entitled to the benefits of the Loan Agreement. Interest only on this Note shall be due and payable on October 15, 1999, November 15, 1999 and December 15, 1999. Thereafter, the principal of this Note shall be due and payable (a) in fifty-nine consecutive monthly installments of $25,000.00 each, with the first such installment being due and payable on January 15, 2000, and a like installment being due and payable on the first day of each succeeding month to and including November 15, 2004; and (b) one final installment in an amount equal to all remaining unpaid principal and accrued and unpaid interest on this Note shall be due and payable on December 15, 2004. Interest, computed on the unpaid balance of this Note, shall be due and payable as it accrues, on the same dates as, but in addition to, the installments of principal. All payments and prepayments shall be applied first to accrued and unpaid interest, and the balance to principal. Partial prepayments of principal shall be applied to the installments of principal thereof in the inverse order of their maturity. All of the past due principal and accrued interest hereunder shall, at the option of Lender, bear interest from maturity (stated or by acceleration) until paid at a rate per annum equal to the Highest Lawful Rate. This Note is secured as provided in the Loan Agreement and in the other Loan Papers, to which reference is hereby made for a description of the properties and assets in which a lien and security interest has been granted, the nature and extent of the security, the terms and conditions upon which the liens and security interests were granted and the rights of the holder of this Note with respect thereto. Time is of the essence of this Note. Upon the occurrence of any one or more of the Events of Default specified in the Loan Agreement, all amounts then remaining unpaid on this Note shall become, or may be declared to be, immediately due and payable, all as provided therein. Borrower and any and all co-makers, endorsers, guarantors and sureties severally waive notice (including, but not limited to, notice of protest, notice of dishonor, notice of intent to accelerate and notice of acceleration), demand, presentment for payment, protest, diligence in collecting or bringing suit and the filing of suit for the purpose of fixing liability, and consent that the time of payment hereof may be extended and re-extended from time to time without notice to them or any of them, and each agrees that his, her or its liability on or with respect to this Note shall not be affected, diminished or impaired by any (a) release of any security at any time existing for this Note, (b) substitution for any security at any time existing for this Note, or (c) failure to perfect (or to maintain perfection of) any lien on or security interest in any such security, in each casein whole or in part, with or without notice, before or after maturity. It is the intention of Borrower and Lender that Lender shall conform strictly to usury laws applicable to it. Accordingly, if the transactions contemplated by the Loan Agreement and this Note would be usurious as to Lender under laws applicable to it (including the laws of the United States of America and the State of Texas or any other jurisdiction whose laws may be mandatorily applicable to Lender notwithstanding the other provisions of the Loan Agreement and this Note), then, in that event, notwithstanding anything to the contrary in this Note, the Loan Agreement or any other Loan Paper or other agreement entered into in connection with or as security for this Note, (i) the aggregate of all consideration which is contracted for, taken, reserved, charged or received by Lender under this Note, the Loan Agreement or any other Loan Paper or agreement entered into in connection with or 2 as security for this Note shall under no circumstances exceed the maximum amount allowed by such applicable law, and any excess shall be credited by Lender on the principal amount of the Obligations to Lender (or, to the extent that the principal amount of the Obligations shall have been or would thereby be paid in full, refunded by Lender to the Borrower); and (ii) in the event that the maturity of this Note is accelerated by reason of an Event of Default under the Loan Agreement or otherwise, or in the event of any prepayment, then such consideration that constitutes interest under law applicable to Lender may never include more than the maximum amount allowed by such applicable law, and excess interest, if any, provided for in this Note, the Loan Agreement or otherwise shall be cancelled automatically by Lender as of the date of such acceleration of prepayment and, if theretofore paid, shall be credited by Lender on the principal amount of the Obligations (or, to the extent that the principal amount of such Obligations shall have been or would thereby be paid in full, refunded by Lender to the Borrower). To the extent that Texas Finance Code Section 303.201, as supplemented by Article 5069-ID.002 of the Texas Revised Civil Statutes (Texas Credit Title) is relevant to Lender for the purposes of determining the Highest Lawful Rate, the applicable rate ceiling under such provisions shall be determined by the indicated (weekly) rate ceiling from time to time in effect, subject to Lender's right subsequently to change such method in accordance with applicable law. Notwithstanding anything to the contrary contained herein or in any of the other Loan Papers, it is not the intention of the Lender to accelerate the maturity of any interest that has not accrued at the time of such acceleration or to collect unearned interest at the time of such acceleration. This Note is performable and payable in the County of Midland, State of Texas, and shall be construed in accordance with, and governed by, the laws of the State of Texas; provided, however, that the laws pertaining to allowable rates of interest may, from time to time, be governed by the laws of the United States of America. NATURAL GAS SERVICES GROUP, INC. By: ----------------------------- 3 EXHIBIT B REVOLVING LINE OF CREDIT PROMISSORY NOTE $750,000.00 September 15, 1999 FOR VALUE RECEIVED, in the manner, on the dates and in the amounts herein stipulated, NATURAL GAS SERVICES GROUP, INC., a Texas corporation ("Borrower"), hereby promises and, agrees to pay to the order of WESTERN NATIONAL BANK, a national banking association ("Lender"), in Midland, Midland County, Texas, the principal sum of Seven Hundred Fifty Thousand and No/100 Dollars ($750,000.00) or, if less, the aggregate unpaid principal amount outstanding hereunder, in lawful money of the United States of America, which shall be legal tender in payment of all debts and dues, public and private, at the time of payment, together with interest on the unpaid principal amount hereof from time to time outstanding until maturity at a rate per annum which shall from day to day be equal to the lesser of (a) one percent (1.00%) over the Prime Rate (the "Established Rate") in effect from day to day (calculated on the basis of actual days elapsed, but computed as if each calendar year consisted of 360 days) or (b) the Highest Lawful Rate. Each change in the rate of interest charged under this Revolving Line of Credit Promissory Note (this "Note") shall, subject to the terms hereof, become effective, without notice to Borrower, upon the effective date of, each change in the Prime Rate or the Highest Lawful Rate, as he case may be. Notwithstanding the foregoing, if at any time the Established Rate exceeds the Highest Lawful Rate, the rate of interest on this Note shall be limited to the Highest Lawful Rate, but any subsequent reductions in the Established Rate shall not reduce the rate of interest hereon below the Highest Lawful Rate until the total amount of interest accrued hereon approximately equals the amount of interest which would have accrued hereon if the Established Rate had at all times been in effect. In the event that at maturity (stated or by acceleration), or at final payment of this Note, the total amount of interest paid or accrued; hereon is less than the amount of interest which would have accrued if the Established Rate had at all times been in effect, then, at such time and to the extent permitted by applicable laws, Borrower shall pay to Lender an amount equal to the difference between (a) the lesser of the amount of interest which would have accrued if the Established Rate had at all times been in effect or the amount of interest which would have accrued if the Highest Lawful Rate had at all times been in effect, and (b) the amount of interest actually paid or accrued on this Note. Interest calculations may be made ten days prior to any interest installment due date under this Note, in which event, if there is an adjustment in the interest rate in accordance with the terms hereof during such ten-day period, then Borrower shall subsequently, on demand, pay to Lender any underpayment, or Lender shall pay to Borrower, any overpayment, as the case may be, as a result of any adjustment during such ten-day period. This Note is the Revolving Line of Credit Promissory Note referred to in the Loan Agreement, dated as of the date hereof (as the same may be amended, supplemented or otherwise modified from time to time, the "Loan Agreement"), by and between Borrower and Lender, and is subject to the terms and conditions thereof. Reference is made to the Loan Agreement for provisions for the disbursement of funds hereunder and for a further statement of the rights, remedies, powers, privileges, benefits, duties and obligations of Borrower and Lender under the Loan Agreement and this Note. Terms used herein which are defined in the Loan Agreement shall have such defined meanings unless otherwise defined herein. The holder of this Note shall be entitled to the benefits of the Loan Agreement. Advances and Subsequent Advances under this (Note shall be made in accordance with the provisions of the Loan Agreement. Subject to the terms hereof and of the Loan Agreement, Borrower may borrow, repay and reborrow at any time and from time to time under his Note; provided, however, that the principal sum outstanding hereunder at any one time shall never exceed the lesser of (i) $750,000.00 or (ii) the Borrowing Base then in effect. Interest on the outstanding principal balance of this Note shall be due and payable monthly on the first day of each month, commencing October 15, 1999. The then outstanding principal balance of this Note and all accrued and unpaid interest shall be due September 15, 2001. All of the past due principal and accrued interest hereunder shall, at the option of Lender, bear interest from maturity (stated or by acceleration) until paid at a rate per annum equal to the Highest Lawful Rate. This Note is secured as provided in the Loan Agreement and in the other Loan Papers, to which reference is hereby made for a description of the properties and assets in which a lien and security interest has been granted, the nature and extent of the security, the terms and conditions upon which the liens and security interests were granted and the rights of the holder of this Note with respect thereto. Time is of the essence of this Note. Upon the occurrence of any one or more of the Events of Default specified in the Loan Agreement, all amounts then remaining unpaid on this Note shall become, or may be declared to be, immediately due and payable, all as provided therein. Borrower and any and all co-makers, endorsers, guarantors and sureties severally waive notice (including, but not limited to, notice of protest, notice of dishonor, notice of intent to accelerate and notice of acceleration), demand, presentment for payment, protest, diligence in collecting or bringing suit and the filing of suit for the purpose of fixing liability, and consent that the time of payment hereof may be extended and re-extended from time to time without notice to them or any of them, and each agrees that his, her or its liability on or with respect to this Note shall not be affected, diminished or impaired by any (a) release of any security at any time existing for this Note, (b) substitution for any security at any time existing for this Note, or (c) failure to perfect (or to maintain perfection of) any lien on or security interest in any such security, in each case in whole or in part, with or without notice, before or after maturity. It is the intention of Borrower and Lender that Lender shall conform strictly to usury laws applicable to it. Accordingly, if the transactions contemplated by the Loan Agreement and this Note would be usurious as to Lender under laws applicable to it (including the laws of the United States of America and the State of Texas or any other jurisdiction whose laws may be mandatorily applicable to Lender notwithstanding the other provisions of the Loan Agreement and this Note), then, in that event, notwithstanding anything to the contrary in this Note, the Loan Agreement or any other Loan Paper or other agreement entered into in connection with or as security for this Note, (i) the aggregate of all consideration which is contracted for, taken, reserved, charged or received by Lender under this Note, the Loan Agreement or any other Loan 2 Paper or agreement entered into in connection with or as security for this Note shall under no circumstances exceed the maximum amount allowed by such applicable law, and any excess shall be credited by Lender on the principal amount of the Obligations to Lender (or, to the extent that the principal amount of the Obligations shall have been or would thereby be paid in full, refunded by Lender to the Borrower); and (ii) in the event that the maturity of this Note is accelerated by reason of an Event of Default under the Loan Agreement or otherwise, or in the event of any prepayment, then such consideration that constitutes interest under law applicable to Lender may never include more than the maximum amount allowed by such applicable law, and excess interest, if any, provided for in this Note, the Loan Agreement or otherwise shall be cancelled automatically by Lender as of the date of such acceleration of prepayment and, if theretofore paid, shall be credited by Lender on the principal amount of the Obligations (or, to the extent that the principal amount of such Obligations shall have been or would thereby be paid in full, refunded by Lender to the Borrower). To the extent that Texas Finance Code Section 303.201, as supplemented by Article 5069-ID.002 of the Texas Revised Civil Statutes (Texas Credit Title) is relevant to Lender for the purposes of determining the Highest Lawful Rate, the applicable rate ceiling under such provisions shall be determined by the indicated (weekly) rate ceiling from time to time in effect, subject to Lender's right subsequently to change such method in accordance with applicable law. Notwithstanding anything to the contrary contained herein or in any of the other Loan Papers, it is not the intention of the Lender to accelerate the maturity of any interest that has not accrued at the time of such acceleration or to collect unearned interest at the time of such acceleration. This Note is performable and payable in the County of Midland, State of Texas, and shall be construed in accordance with, and governed by, the laws of the State of Texas; provided, however, that the laws pertaining to allowable rates of interest may, from time to time, be governed by the laws of the United States of America. NATURAL GAS SERVICES GROUP, INC. By: --------------------------------- 3 STOCK PLEDGE AGREEMENT THIS STOCK PLEDGE AGREEMENT, dated as of September __, 1999, is made by and between NATURAL GAS SERVICES GROUP, INC., a Texas corporation (the "Pledgor"), and WESTERN NATIONAL BANK, a national banking association (the "Lender"). WITNESSETH WHEREAS, pursuant to that certain Loan Agreement, dated as of __________, 1999, between the Pledgor and the Lender (as amended, supplemented or otherwise modified from time to time, the "Loan Agreement"), the Lender has agreed to make loans to the Pledgor upon the terms and subject to the conditions set forth therein, to be evidenced by the Notes (as defined in the Loan Agreement) issued by the Pledgor thereunder; the Pledgor is the legal and beneficial owner of the shares of Pledged Stock (as hereinafter defined) issued by ____________________, a ___________________ organized under the laws of Texas (the "Issuer"); it is a condition precedent to the obligation of the Lender to make loans to the Pledgor under the Loan Agreement that the Pledgor shall have executed and delivered this Stock Pledge Agreement to the Lender; and NOW, THEREFORE in consideration of the premises and to induce the Lender to enter into the Loan Agreement and to make loans to Pledgor under the Loan Agreement, the Pledgor hereby agrees with the Lender, as follows: 1. Defined Terms. Unless otherwise defined herein, terms which are defined in the Loan Agreement and used herein are so used as so defined, and the following terms shall have the following meanings: "Code" means the Uniform Commercial Code from time to time in effect in the State of Texas. "Collateral" means the Pledged Stock and all Proceeds from the Pledged Stock. "Obligations" means the unpaid principal of and interest on the Notes and all other present and future indebtedness, obligations and liabilities of the Pledgor and any of its Subsidiaries to the Lender, and all renewals, rearrangements and extensions thereof, or any part thereof, now or hereafter owed to Lender by the Pledgor or any of its Subsidiaries arising from, by virtue of, or pursuant to any Loan Paper, or otherwise, together with all interest accruing thereon and all costs, expenses and attorneys' fees incurred in the enforcement or collection thereof, whether such indebtedness, obligations and liabilities are direct, indirect, fixed, contingent, liquidated, unliquidated, joint, several, or joint and several or were, prior to acquisition thereof by Lender, owed to some other person. "Stock Pledge Agreement" means this Stock Pledge Agreement, as amended, supplemented or otherwise modified from time to time. "Pledged Stock" means the shares of capital stock of the Issuer listed on Schedule 1 hereto, together with all stock certificates, options or rights of any nature whatsoever that may be issued or granted by the Issuer to the Pledgor while this Stock Pledge Agreement is in effect. "Proceeds" means all "proceeds" as such term is defined in Section 9.306(1) of the Code and, in any event, shall include, without limitation, all dividends or other income from the Pledged Stock, collections thereon or distributions with respect thereto. 2. Pledge; Grant of Security Interest. The Pledgor hereby delivers to the Lender all the Pledged Stock and hereby, grants to the Lender, a first and prior security interest and Bank Lien in the Collateral, as collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Obligations. 3. Stock Powers. Concurrently with the delivery to the Lender of each certificate representing one or more shares of Pledged Stock to the Lender, the Pledgor shall deliver an undated stock power covering such certificate, duly executed in blank by the Pledgor with, if the Lender so requests, signature guaranteed. 4. Representations and Warranties. The Pledgor represents and warrants that: (a) the shares of Pledged Stock listed on Schedule I constitute all the issued and outstanding shares of all classes of capital stock of the Issuer; (b) all the shares of the Pledged Stock have been duly and validly issued and are fully paid and nonassessable; (c) the Pledgor is the record and beneficial owner of, and has good and marketable title to, the Pledged Stock listed on Schedule I, free of any and all Liens or options in favor of, or claims of, any other person, except the Bank Lien created by this Stock Pledge Agreement; (d) upon delivery to the Lender of the stock certificates evidencing the Pledged Stock, the Lien granted pursuant to this Stock Pledge Agreement will constitute a valid, perfected first priority Bank Lien on the Collateral, enforceable as such against all creditors of the Pledgor and any person purporting to purchase any Collateral from the Pledgor; and (e) with respect to the Pledged Stock, the Pledgor has obtained from the Issuer and has delivered to the Lender an Acknowledgment and Consent, substantially in the form attached hereto as Annex I, executed by the Issuer. 5. Covenants. The Pledgor covenants and agrees with the Lender that, from and after the date of this Stock Pledge Agreement until the, Obligations are paid in full: If the Pledgor shall, as a result of its ownership of the Pledged Stock, become entitled to receive or shall receive any stock certificate (including, without limitation, any certificate -2- representing a stock dividend or a distribution in connection with any reclassification, increase or reduction of capital or any certificate issued in connection with any reorganization), option or rights, whether in addition to, in substitution of, as a conversion of, or in exchange for any shares of the Pledged Stock, or otherwise in respect thereof, the Pledgor shall accept the same as the agent of the Lender, and deliver the same forthwith to the Lender in the exact form received, duly indorsed by the Pledgor to the Lender, if required, together with an undated stock power covering such certificate duly executed in blank by the Pledgor and with, if the Lender so requests, signature guaranteed, to be held by the Lender, subject to the terms hereof, as additional collateral security for the Obligations. Any sums paid upon or in respect of the Pledged Stock upon the liquidation or dissolution of the Issuer shall be paid over to the Lender to be held by it hereunder as additional collateral security for the Obligations, and in case any distribution of capital shall be made on or in respect of the Pledged Stock or any property shall be distributed upon or with respect to the Pledged Stock pursuant to the recapitalization or reclassification of the capital of the Issuer, or pursuant to the reorganization thereof, the property so distributed shall be delivered to the Lender to be held by it hereunder as additional collateral security for the Obligations. If any sums of money or property so paid or distributed in respect of the Pledged Stock shall be received by the Pledgor, the Pledgor shall, until such money or property is paid or delivered to the Lender, hold such money or property in trust for the Lender, segregated from other funds of the Pledgor, as additional collateral security for the Obligations. Without the prior written consent of the Lender, the Pledgor will not (i) vote to enable, or take any other action to permit, the Issuer to issue any stock or other equity securities of any nature or to issue any other securities convertible into or granting the right to purchase or exchange for any stock or other equity securities of any nature of the Issuer, (ii) sell, assign, transfer, exchange, or otherwise dispose of, or grant any option with respect to, the Collateral, or (iii) create, incur or permit to exist any Lien or option in favor of, or any claim of any person with respect to, any of the Collateral, or any interest therein, except for the Bank Lien provided for by this Stock Pledge Agreement. The Pledgor will defend the right, title and interest of the Lender in and to the Collateral against the claims and demands of all persons whomsoever. At any time and from time to time, upon the written request of the Lender, and at the sole expense of the Pledgor, the Pledgor will promptly and duly execute and deliver such further instruments and documents and take such further actions as the Lender may reasonably request for the purposes of obtaining or preserving the full benefits of this Stock Pledge Agreement and of the rights and powers herein granted. If any amount payable under or in connection with any of the Collateral shall be or become evidenced by any promissory note, other instrument or chattel paper, such note, instrument or chattel paper shall be immediately delivered to the Lender, duly endorsed in a manner satisfactory to the Lender, to be held as Collateral pursuant to this Stock Pledge Agreement. The Pledgor agrees to pay, and to save the Lender harmless from, any and all liabilities with respect to, or resulting from any delay in paying, any and all stamps, excise, sales or other taxes which may be payable or determined to be payable with respect to any of the Collateral or in connection with any of the transactions contemplated by this Stock Pledge Agreement. 6. Cash Dividends; Voting Rights; Interest and Principal Payments. Unless an Event of Default shall have occurred and be continuing and the Lender shall have given notice to the -3- Pledgor of the Lender's intent to exercise its corresponding rights pursuant to paragraph 7 below, the Pledgor shall be permitted to receive all cash dividends paid in the normal course of business of the Issuer, to the extent permitted in the Loan Agreement, in respect of the Pledged Stock and to exercise all voting and corporate rights with respect to the Pledged Stock, provided, however, that no vote shall be cast or corporate right exercised or other action taken which, in the Lender's reasonable judgment, would impair the Collateral or which would be inconsistent with or result in any violation of any provision of the Loan Agreement, the Notes or this Stock Pledge Agreement. 7. Rights of the Lender. (a) If an Event of Default shall occur and be continuing and the Lender shall give notice of its intent to exercise: such rights to the Pledgor, (i) the Lender shall have the right to receive any and all cash dividends paid in respect of the Pledged Stock and make application thereof to the Obligations in such order as the Lender may determine and (ii) all shares of the Pledged Stock shall be registered in the name of the Lender or its nominee, and the Lender or its nominee may thereafter exercise (A) all voting, corporate and other rights pertaining to such shares of the Pledged Stock at any meeting of shareholders of the Issuer or otherwise and (B) any and all right of conversion, exchange, subscription and any other rights, privileges or options pertaining to such shares of the Pledged Stock as if it were the absolute owner thereof (including, without limitation, the right to exchange at its discretion any and all of the Pledged Stock upon the merger, conversion, consolidation, reorganization, recapitalization or other fundamental change in the corporate structure of the Issuer, or upon the exercise by the Pledgor or the Lender of any rights, privilege or option pertaining to such shares of the Pledged Stock, and in connection therewith, the right to deposit and deliver any and all of the Pledged Stock with any committee, depositary, transfer agent, registrar or other designated agency upon such terms and conditions as it may determine). (b) The rights of the Lender hereunder shall not be conditioned or contingent upon the pursuit by the Lender of any right or remedy against the Issuer, any Guarantor or any other person which may be or become liable in respect of all or any part of the Obligations or against any collateral security or guarantee therefor or right of offset with respect thereto. Lender shall not be liable for any failure to demand, collect or realize upon all or any part of the Collateral or for any delay in doing so, nor shall the Lender be under any obligation to sell or otherwise dispose of any Collateral upon the request of the Pledgor or any other person or to take any other action whatsoever with regard to the Collateral or any part thereof. 8. Remedies. If an Event of Default shall occur and be continuing, the Lender may exercise, in addition to all other rights and remedies granted in this Stock Pledge Agreement and in any other instrument or agreement securing, evidencing or relating to the Obligations, all rights and remedies of a secured party under the Code. Without limiting the generality of the foregoing, the Lender, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon the Pledgor, the Issuer or any other person (all and each of which demands, defenses, advertisements and notices are hereby waived) may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, assign, give option or options to purchase or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or -4- private sale or sales, in the over-the-counter market, at any exchange, broker's board or office of the Lender or elsewhere upon such terms and conditions as Lender may deem advisable and at such prices as Lender may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Lender shall have the right upon any such public sale or sales, and, to the extent permitted bylaw, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in the Pledgor, which right or equity is hereby waived or released. The Lender shall apply any Proceeds from time to time held by it and the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred in respect thereof or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Lender hereunder, including, without limitation, reasonable attorneys-fees and disbursements of counsel to the Lender, to the payment in whole or in part of the Obligations, in such order as the Lender may elect, and only after such application and after the payment by the Lender of any other amount required by any provision of law, including, without limitation, Section 9-504(1)(c) of the Code, need the Lender account for the surplus, if any, to the Pledgor. To the extent permitted by applicable law, the Pledgor waives all claims, damages and demands it may acquire against the Lender arising out of the exercise by it of any rights hereunder. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least 10 days before such sale or other disposition. 9. Private Sales. (a) If the Lender exercises its right to sell any or all of the Pledged Stock pursuant to paragraph 8 hereof, the Pledgor recognizes that the Lender may be unable to effect a public sale of any or all the Pledged Stock, by reason of certain prohibitions contained in the Securities Act of 1933,as amended (the "Securities Act"), and applicable state securities laws or otherwise, and may be compelled to resort to one or more private sales thereof to a restricted group of purchasers which will be obliged to agree, among other things, to acquire such securities for their own account for investment and not with a view to the distribution or resale thereof. The Pledgor acknowledges and agrees that any such private sale may result in prices and other terms less favorable than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner. The Lender shall be under no obligation to delay, a sale of any of the Pledged Stock for the period of time necessary to permit the Issuer to register such securities for public sale under the Securities Act, or under applicable state securities laws, even if the Issuer would agree to do so. (b) The Pledgor further agrees to use its best efforts to do or cause to be done all such other acts as may be necessary to make such sale or sales of all or any portion of the Pledged Stock pursuant to this paragraph 9 valid and binding and in compliance with any and all other applicable Requirements of Law. The Pledgor further agrees that a breach of any of the covenants contained in this paragraph 9 will cause irreparable injury to the Lender, that the Lender has no adequate remedy at law in respect of such breach and, as a consequence, that each and every covenant contained in this paragraph 9 shall be specifically enforceable against the Pledgor, and the Pledgor hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants, except for a defense that no Event of Default has occurred under the Loan Agreement. -5- 10. Limitation on Duties Regarding Collateral. The Lender's sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-2 07 of the Code or otherwise, shall be to deal with it in the same manner as the Lender deals with similar securities and property for its own account. Neither the Lender nor any of its directors, officers, employees or agents shall be liable for failure to demand, collect or realize upon any of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of the Pledgor or otherwise. 11. Powers Coupled with an Interest. All authorizations and agencies herein contained with respect to the Collateral are irrevocable and powers coupled with an interest. 12. Severability. Any provision of this Stock Pledge Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 13. Paragraph Headings. The paragraph headings used in this Stock Pledge Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 14. No Waiver: Cumulative Remedies. The Lender shall not by any act (except by a written instrument pursuant to paragraph 15 hereof) be deemed to have waived any right or remedy hereunder or to have acquiesced in any Event of Default under the Loan Agreement or in any breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of the Lender, any rights, powers or privileges hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Lender of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Lender would otherwise have on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any other rights or remedies provided bylaw. 15. Waivers and Amendments Successors and Assigns; Governing Law. None of the terms or provisions of this Stock Pledge Agreement may be amended, supplemented or otherwise modified except by a written instrument executed by the Pledgor and the Lender, provided that any provision of this Stock Pledge Agreement may be waived by the Lender in a letter or agreement executed by the Lender or by telex or facsimile transmission from the Lender. This Stock Pledge Agreement shall be binding upon the permitted successors and assigns of the Pledgor and shall inure to the benefit of the Lender and its successors and assigns. THIS STOCK PLEDGE AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS. -6- 16. Notices. Notices by the Lender to the Pledgor or the Issuer may be given by mail, by telegraph or by facsimile transmission; addressed or transmitted to the appropriate party at the Pledgor's address set forth in the Loan Agreement and shall be effective (a) in the case of mail, three days after deposit in the postal system, postage pre-paid, (b) in the case of facsimile notices, when sent and (c) in the case of telegraphic notice, when delivered to the telegraph company. The Pledgor and the Issuer may change their respective addresses and transmission numbers by written notice to the Lender. 17. Irrevocable Authorization and Instruction to Issuer. The Pledgor hereby authorizes and instructs the Issuer to comply with any instruction received by it from the Lender in writing that (a) states that an Event of Default has occurred and (b) is otherwise in accordance with the terms of this Stock Pledge Agreement, without any other or further instructions from the Pledgor, and the Pledgor agrees that the Issuer shall be fully protected in so complying. -7- IN WITNESS WHEREOF, the undersigned has caused this Stock Pledge Agreement to be duly executed and delivered as of the date first above written. NATURAL GAS SERVICES GROUP, INC. By: ------------------------------ -8- ANNEX I ACKNOWLEDGMENT AND CONSENT The Issuer referred to in the foregoing Stock Pledge Agreement hereby (i) consents to the pledge of the Pledged Stock and waives any and all restrictions applicable thereto, (ii) acknowledges receipt of a copy of the Stock Pledge Agreement and (iii) agrees to be bound thereby and to comply with the terms thereof insofar as such terms are applicable to it. The Issuer agrees to notify the Lender promptly in writing of the occurrence of any of the events described in paragraph 5(a) of the Stock Pledge Agreement. ------------------------- SCHEDULE I TO STOCK PLEDGE AGREEMENT DESCRIPTION OF PLEDGED STOCK
STOCK CLASS OF CERTIFICATE NO. OF ISSUER STOCK NO. SHARES ------ -------- ----------- ------
LIMITED LIABILITY COMPANY PLEDGE AGREEMENT THIS LIMITED LIABILITY COMPANY PLEDGE AGREEMENT, dated as of September ____, 1999, is made by and between ___________________, a Texas ________________ (the "Pledgor"), and WESTERN NATIONAL BANK, a national banking association (the "Lender"). WITNESSETH WHEREAS, pursuant to that certain Loan Agreement, dated as of _________________, 1999, between _______________________ and the Lender (as amended, supplemented or otherwise modified from time to time, the "Loan Agreement"), the Lender has agreed to make loans to __________________________________ upon the terms and subject to the conditions set forth therein, to be evidenced by the Notes (as defined in the Loan Agreement) issued by __________________________ thereunder; the Pledgor is the legal and beneficial owner of the Pledged Interests (as hereinafter defined) issued by ___________________________, a ___________________ organized under the laws of Texas (the "Issuer"); it is a condition precedent to the obligation of the Lender to make loans to under the Loan Agreement that the Pledgor shall have executed and delivered this Pledge Agreement to the Lender; and NOW, THEREFORE, in consideration of the premises and to induce the Lender to enter into the Loan Agreement and to make loans to _____________________ under the Loan Agreement, the Pledgor hereby agrees with the Lender, as follows: 1. Defined Terms. Unless otherwise defined herein, terms which are defined in the Loan Agreement and used herein are so used as so defined, and the following terms shall have the following meanings: "Code" means the Uniform Commercial Code from time to time in effect in the State of Texas. "Collateral" means the Pledged Interests and all Proceeds from the Pledged Interests. "Obligations" means the unpaid principal of and interest on the Notes and all other present and future indebtedness, obligations and liabilities of _____________________ and any of its Subsidiaries to the Lender, and all renewals, rearrangements and extensions thereof, or any part thereof, now or hereafter owed to Lender by ________________________ or any of its Subsidiaries arising from, by virtue of, or pursuant to any Loan Paper, or otherwise, together with all interest accruing thereon and all costs, expenses and attorneys' fees incurred in the enforcement or collection thereof, whether such indebtedness, obligations and liabilities are direct, indirect, fired, contingent, liquidated, unliquidated, joint, several, or joint and several or were, prior to acquisition thereof by Lender, owed to some other person. "Pledge Agreement" means this Limited Liability Company Pledge Agreement, as amended, supplemented or otherwise modified from time to time. "Pledged Interests" means the limited liability company interests in the Issuer listed on Schedule I hereto, together with all certificates, options or rights of any nature whatsoever that may be issued or granted by the Issuer to the Pledgor while this Pledge Agreement is in effect. "Proceeds" means all "proceeds" as such term is defined in Section 9.306(1) of the Code and, in any event, shall include, without limitation, all dividends or other income from the Pledged Interests, collections thereon or distributions with respect thereto. 2. Pledge; Grant of Security Interest. The Pledgor hereby delivers to the Lender all the Pledged Interests and hereby grants to the Lender, a first and prior security interest and Bank Lien in the Collateral, as collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Obligations. 3. Stock Powers. Concurrently with the delivery to the Lender of each certificate representing the Pledged Interests to the Lender, the Pledgor shall deliver an undated stock power (in form and substance satisfactory to the Lender) covering such certificate, duly executed in blank by the Pledgor with, if the Lender so requests, signature guaranteed. 4. Representations and Warranties. The Pledgor represents and warrants that: (a) the Pledged Interests listed on Schedule I constitute the indicated percentage interest of the issued and outstanding membership interests of all classes of interest in the Issuer; (b) all the Pledged Interests have been duly and validly issued and are fully paid and nonassessable; (c) the Pledgor is the record and beneficial owner of, and has good and marketable title to, the Pledged Interests listed on Schedule I, free of any and all Liens or options in favor of, or claims of, any other person, except the Bank Lien created by this Pledge Agreement; (d) upon delivery to the Lender of the certificates evidencing the Pledged Interests, the Lien granted pursuant to this Pledge Agreement will constitute a valid, perfected first priority Bank Lien on the Collateral, enforceable as such against all creditors of the Pledgor and any person purporting to purchase any Collateral from the Pledgor; and (e) with respect to the fledged Interests, the Pledgor has obtained from the Issuer and has delivered to the Lender an Acknowledgment and Consent, substantially in the form attached hereto as Annex I, executed by the Issuer. 2 5. Covenants. The Pledgor covenants and agrees with the Lender that, from and after the date of this Pledge Agreement until the Obligations are paid in full: (a) If the Pledgor shall, as a result of its ownership of the Pledged Interests, become entitled to receive or shall receive any certificate (including, without limitation, any certificate representing a dividend or a distribution in connection with any reclassification, increase or reduction of capital or any certificate issued in connection with any reorganization), option or rights, whether in addition to, in substitution of, as a conversion of, or in exchange for any part of the Pledged Interests, or otherwise in respect thereof, the Pledgor shall accept the same as the agent of the Lender, and deliver the same forthwith to the Lender in the exact form received, duly indorsed by the Pledgor to the Lender, if required, together with an undated stock power covering such certificate duly executed in blank by the Pledgor and with, if the Lender so requests, signature guaranteed, to be held by the Lender, subject to the terms hereof, as additional collateral security for the Obligations. Any sums paid upon or in respect of the Pledged Interests upon the liquidation or dissolution of the Issuer shall be paid over to the Lender to be held by it hereunder as additional collateral security for the Obligations, and in case any distribution of capital shall be made on or in respect of the Pledged Interests or any property shall be distributed upon or with respect to the Pledged Interests pursuant to the recapitalization or reclassification of the capital of the Issuer, or pursuant to the reorganization thereof, the property so distributed shall be delivered to the Lender to be held by it hereunder as additional collateral security for the Obligations. If any sums of money or property so paid or distributed in respect of the Pledged Interests shall be received by the Pledgor, the Pledgor shall, until such money or property is paid or delivered to the Lender, hold such money or property in trust for the Lender, segregated from other funds of the Pledgor, as additional collateral security for the Obligations. (b) Without the prior written consent of the Lender, the Pledgor will not (i) vote to enable, or take any other action to permit, the Issuer to issue any equity securities of any nature or to issue any other securities convertible into or granting the right to purchase or exchange for any interest or other equity securities of any nature of the Issuer, (ii) sell, assign, transfer, exchange, or otherwise dispose of, or grant any option with respect to, the Collateral, or (iii) create, incur or permit to exist any Lien or option in favor of, or any claim of any person with respect to, any of the Collateral, or any interest therein, except for the Bank Lien provided for by this Pledge Agreement. The Pledgor will defend the right, title and interest of the Lender in and to the Collateral against the claims and demands of all persons whomsoever. (c) At anytime and from time to time, upon the written request of the Lender, and at the sole expense of the Pledgor, the Pledgor will promptly and duly execute and deliver such further instruments and documents and take such further actions as the Lender may reasonably request for the purposes of obtaining or preserving the full benefits of this Pledge Agreement and of the rights and powers herein granted. If any amount payable under or in connection with any of the Collateral shall be or become evidenced by any promissory note, other instrument or chattel paper, such note, instrument or chattel paper shall be immediately delivered to the Lender, duly endorsed 3 in a manner satisfactory to the Lender, to be held as Collateral pursuant to this Pledge Agreement. (d) The Pledgor agrees to pay, and to save the Lender harmless from, any and all liabilities with respect to, or resulting from any delay in paying, any and all stamps, excise, sales or other taxes which may be payable or determined to be payable with respect to any of the Collateral or in connection with any of the transactions contemplated by this Pledge Agreement. 6. Cash Dividends; Voting Rights; Interest and Principal Payments. Unless an Event of Default shall have occurred and be continuing and the Lender shall have given notice to the Pledgor of the Lender's intent to exercise its corresponding rights pursuant to paragraph 7 below, the Pledgor shall be permitted to receive all cash dividends or distributions paid in the normal course of business of the Issuer, to the extent permitted in the Loan Agreement, in respect of the Pledged Interests and to exercise all voting and corporate rights with respect to the Pledged Interests, provided, however, that no vote shall be cast or right exercised or other action taken which, in the Lender's reasonable judgment, would impair the Collateral or which would be inconsistent with or result in any violation of any provision of the Loan Agreement, the Notes or this Pledge Agreement. 7. Rights of the Lender. (a) If an Event of Default shall occur and be continuing and the Lender shall give notice of its intent to exercise such rights to the Pledgor, (i) the Lender shall have the right to receive any and all cash dividends or distributions paid in respect of the Pledged Interests and make application thereof to the Obligations in such order as the Lender may determine and (ii) all of the Pledged Interests shall be registered in the name of the Lender or its nominee, and the Lender or its nominee may thereafter exercise (A) all voting, membership and other rights pertaining to the Pledged Interests at any meeting of members of managers of the Issuer or otherwise and (B) any and all rights of conversion, exchange, subscription and any other rights, privileges or options pertaining to such shares of the fledged Interests as if it were the absolute owner thereof (including, without limitation, the right to exchange at its discretion any and all of the Pledged Interests upon the merger, conversion, consolidation, reorganization, recapitalization or other fundamental change in the structure of the Issuer, or upon the exercise by the Pledgor or the Lender of any rights, privilege or option pertaining to the Pledged Interests, and in connection therewith, the right to deposit and deliver any and all of the Pledged Interests with any committee, depositary, transfer agent, registrar or other designated agency upon such terms and conditions as it may determine). (b) The rights of the Lender hereunder shall not be conditioned or contingent upon the pursuit by the Lender of any right or remedy against the Issuer, any Guarantor or any other person which may be or become liable in respect of all or any part of the Obligations or against any collateral security or guarantee therefor or right of offset with respect thereto. Lender shall not be liable for any failure to demand, collect or realize upon all or any part of the Collateral or for any delay in doing so, nor shall the Lender be under any obligation to sell or otherwise dispose of any Collateral upon the request of the 4 Pledgor or any other person or to take any other action whatsoever with regard to the Collateral or any part thereof. 8. Remedies. If an Event of Default shall occur and be continuing, the Lender may exercise, in addition to all other rights and remedies granted in this Pledge Agreement and in any other instrument or agreement securing, evidencing or relating to the Obligations, all rights and remedies of a secured party under the Code. Without limiting the generality of the foregoing, the Lender, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon the Pledgor, the Issuer or any other person (all and each of which demands, defenses, advertisements and notices are hereby waived) may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, assign, give option or options to purchase or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, in the over-the-counter market, at any, exchange, broker's board or office of the Lender or elsewhere upon such terms and conditions as Lender may deem advisable and at such prices as Lender may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Lender shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in the Pledgor, which right or equity is hereby waived or released. The Lender shall apply any Proceeds from time to time held by it and the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred in respect thereof or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Lender hereunder, including, without limitation, reasonable attorneys' fees and disbursements of counsel to the Lender, to the payment in whole or in part of the Obligations, in such order as the Lender may elect, and only after such application and after the payment by the Lender of any other amount required by any provision of law, including, without limitation, Section 9-504(1)(c) of the Code, need the Lender account for the surplus, if any, to the Pledgor. To the extent permitted by applicable law, the Pledgor waives all claims, damages and demands it may acquire against the Lender arising out of the exercise by it of any rights hereunder. If any notice of a proposed sale or other disposition of Collateral shall be required by law; such notice shall be deemed reasonable and proper if given at least 10 days before such sale or other disposition. 9. Private Sales. (a) If the Lender exercises its right to sell any or all of the Pledged Interests pursuant to paragraph 8 hereof, the Pledgor recognizes that the Lender may be unable to effect a public sale of any or all the Pledged Interests, by reason of certain prohibitions contained in the Securities Act of 1933, as amended (the "Securities Act"), and applicable state securities laws or otherwise, and may be compelled to resort to one or more private sales thereof to a restricted group of purchasers which will be obliged to agree, among other things, to acquire such securities for their own account for investment and not with a view to the distribution or resale thereof. The Pledgor acknowledges and agrees that any such private sale may result in prices and other terms less favorable than if such sale were a public sale and, notwithstanding such circumstances, agrees that any 5 such private sale shall be deemed to have been made in a commercially reasonable manner. The Lender shall be under no obligation to delay a sale of any of the Pledged Interests for the period of time necessary to permit the Issuer to register such securities for public sale under the Securities Act, or under applicable state securities laws, even if the Issuer would agree to do so. (b) The Pledgor further agrees to use its best efforts to do or cause to be done all such other acts as may be necessary to make such sale or sales of all or any portion of the Pledged Interests pursuant to this paragraph 9 valid and binding and in compliance with any and all other applicable Requirements of Law. The Pledgor further agrees that a breach of any of the covenants contained in this paragraph 9 will cause irreparable injury to the Lender, that the Lender has no adequate remedy at law in respect of such breach and, as a consequence, that each and every covenant contained in this paragraph 9 shall be specifically enforceable against the Pledgor, and the Pledgor hereby waives and agrees not to assert any, defenses against an action for specific performance of such covenants, except for a defense that no Event, of Default has occurred under the Loan Agreement. 10. Limitation on Duties Regarding Collateral. The Lender's sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the Code or otherwise, shall be to deal with it in the same manner as the Lender deals with similar securities and property for its own account. Neither the Lender nor any of its directors, officers, employees or agents shall be liable for failure to demand, collect or realize upon any of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of the Pledgor or otherwise. 11. Powers Coupled with an Interest. All authorizations and agencies herein contained with respect to the Collateral are irrevocable and powers coupled with an interest. 12. Severability. Any provision of this Pledge Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 13. Paragraph Headings. The paragraph headings used in this Pledge Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 14. No Waiver; Cumulative Remedies. The Lender shall not by any act (except by a written instrument pursuant to paragraph 15 hereof) be deemed to have waived any right or remedy hereunder or to have acquiesced in any Event of Default under the Loan Agreement or in any breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of the Lender, any rights, powers or privileges hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Lender of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Lender would otherwise have on any 6 future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any other rights or remedies provided bylaw. 15. Waivers and Amendments; Successors and Assigns; Governing Law. None of the terms or provisions of this Pledge Agreement may be amended, supplemented or otherwise modified except by a written instrument executed by the Pledgor and the Lender, provided that any provision of this Pledge Agreement may be waived by the Lender in a letter or agreement executed by the Lender or by telex or facsimile transmission from the Lender. This Pledge Agreement shall be binding upon the permitted successors and assigns of the Pledgor and shall inure to the benefit of the Lender and its successors and assigns. THIS PLEDGE AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS. 16. Notices. Notices by the Lender to the Pledgor or the Issuer may be given by mail, by telegraph or by facsimile transmission, addressed or transmitted to the appropriate party at the Pledgor's address set forth in the Loan Agreement and shall be effective (a) in the case of mail, three days after deposit in the postal system, postage pre-paid, (b) in the case of facsimile notices, when sent and (c) in the case of telegraphic notice, when delivered to the telegraph company. The Pledgor and the Issuer may change their respective addresses and transmission numbers by written notice to the Lender. 17. Irrevocable Authorization and Instruction to Issuer. The Pledgor hereby authorizes and instructs the Issuer to comply with any instruction received by it from the Lender in writing that (a) states that an Event of Default has occurred and (b) is otherwise in accordance with the terms of this Pledge Agreement, without any other or further instructions from the Pledgor, and the Pledgor agrees that the Issuer shall be fully protected in so complying. IN WITNESS WHEREOF, the undersigned has caused this Pledge Agreement to be duly executed and delivered as of the date first above written. By: ---------------------------- 7 ANNEX I ACKNOWLEDGMENT AND CONSENT The Issuer referred to in the foregoing Pledge Agreement hereby (i) consents to the pledge of the Pledged Interests and waives any and all restrictions applicable thereto, (ii) acknowledges receipt of a copy of the Pledge Agreement and (iii) agrees to be bound thereby and to comply with the terms thereof insofar as such terms are applicable to it. The Issuer agrees to notify the Lender promptly in writing of the occurrence of any of the events described in paragraph 5(a) of the Pledge Agreement. ----------------------------- Annex I - 1 SCHEDULE I TO PLEDGE AGREEMENT DESCRIPTION OF PLEDGED INTERESTS
MEMBERSHIP PERCENTAGE ISSUER CERTIFICATE NO. INTEREST ------ --------------- ---------
[Borrower] SECURITY AGREEMENT This SECURITY AGREEMENT ("Security Agreement"), dated as of the ____ day of September, 1999, is made by NATURAL GAS SERVICES GROUP, INC., a Colorado corporation, with its principal offices at 710 Buffalo Street, Suite 201, Corpus, Texas, 78401 in favor of WESTERN NATIONAL BANK, a national banking association with banking quarters at 500 West Wall, Suite 100, Midland, Texas 79701. WHEREAS, Natural Gas Services Group, Inc. and Western National Bank executed that certain Loan Agreement, dated of even date herewith (which, together with all amendments and supplements thereto, is herein called the "Loan Agreement"), pursuant to which Western National Bank agreed, subject to certain terms and conditions therein stated, to make loans to Natural Gas Services Group, Inc. as provided in the Loan Agreement; and WHEREAS, Western National Bank has conditioned its obligations under the Loan Agreement upon the execution and delivery by Natural Gas Services Group, Inc. of this Security Agreement, and Natural Gas Services Group, Inc. has agreed to make and deliver this Security Agreement. NOW, THEREFORE, (i) in compliance with the terms and conditions of the Loan Agreement, (ii) for and in consideration of the premises and the agreements herein contained, and (iii) for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Natural Gas Services Group, Inc. and Western National Bank agree as follows: SECTION 1. DEFINITIONS Unless otherwise defined herein, terms which are defined in the Loan Agreement and used herein are so used as so defined; and the following terms shall have the following meanings: (a) "Accounts" means all accounts receivable, leases receivable book debts, notes, drafts, instruments, documents, acceptances and other forms of obligations now owned or hereafter received or acquired by or belonging or owing to Debtor (including under any trade names, styles or divisions thereof) whether arising out of goods sold or leased by it or services rendered by it or from any other transaction, whether or not the same involves the sale of goods or performance of services by Debtor (including, without limitation, any such obligation which would be characterized as an account, general intangible or chattel paper under the UCC) and all of Debtor's rights in, to and under all purchase orders now owned or hereafter received or acquired by it for goods or services, and all of Debtor's rights to any goods represented by any of the foregoing (including returned or repossessed goods and unpaid seller's rights) and all moneys due or to become due to Debtor under all contracts for the sale of goods and/or the performance of services by it (whether or not yet earned by performance) or in connection with any other transaction, now in existence or hereafter arising, including, without limitation, the right to receive the proceeds of said purchase orders and contracts, and all collateral security and guarantees of any kind given by any person with respect to any of the foregoing. (b) "Contracts" means the contracts between any person and Debtor, as the same may from time to time be amended, supplemented or otherwise modified, including, without limitation, (i) all rights of Debtor to receive moneys due and to become due to it thereunder or in connection therewith, (ii) all rights of Debtor to damages arising out of, or from, breach or default in respect thereof and (iii) all rights of Debtor to perform and to exercise all remedies thereunder. (c) "Debtor" is Natural Gas Services Group, Inc., a Colorado corporation, and its permitted successors and assigns. (d) "Documents" has the meaning assigned in Section 9.105(6) of the UCC. (e) "Equipment" means all machinery and equipment, now owned or hereafter acquired by Debtor, or in which Debtor now has or hereafter may acquire any right, title or interest and any and all additions, substitutions and replacements thereof, wherever located, together with all attachments, components, parts equipment and accessories installed therein or affixed thereto, including, but not limited to, all equipment as defined in Section 9.109(2) of the UCC. (f) "Instrument" has the meaning assigned in Section 9.105(9) of the UCC. (g) "Inventory" means all inventory, wherever located, now owned or hereafter acquired by the Debtor or in which the Debtor now has or hereafter may acquire any right, title or interest, including, without limitation, all goods and other personal property now or hereafter owned by the Debtor which are held for sale or lease or are furnished or are to be furnished under a contract of service or which constitute raw materials, work in process or materials used or consumed or to be used or consumed in the business of the Debtor, or in the processing, packaging or shipping of the same, and all finished good, including, but not limited to, all inventory as defined in Section 9.109(4) of the UCC. (h) "Obligations" means the unpaid principal of and interest on the Notes and all other present and future indebtedness, obligations and liabilities of the Debtor and any of its Subsidiaries to the Secured Party, and all renewals, rearrangements and extensions thereof, or any part thereof, now or hereafter owed to Secured Party by the Debtor or any of its Subsidiaries arising from, by virtue of, or pursuant to any Loan Paper, or otherwise, together with all interest accruing thereon and all costs, expenses and attorneys' fees incurred in the enforcement or collection thereof, whether such indebtedness, obligations and liabilities are direct, indirect, fixed, contingent, liquidated, unliquidated, joint, several, or joint and several or were, prior to acquisition thereof by Lender, owed to some other person. (i) "Proceeds" means all "proceeds" as such term is defined in Section 9.306(a) of the UCC and, in any event, shall mean and include, but not be limited to, the following at any time whatsoever arising or receivable: (i) whatever is received 2 upon any collection, exchange, sale or other disposition of any of the Collateral, and any property into which any of the Collateral is converted, whether cash or non-cash proceeds, (ii) any and all proceeds of any insurance, indemnity, warranty or guaranty payable to Debtor from time to time with respect to any of the Collateral, and (iii) any and all payments (in any form whatsoever) made or due and payable to Debtor from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Collateral by any governmental body, authority, bureau or agency (or any person acting under color of Governmental Authority). (j) "Secured Party" is Western National Bank, a national banking association, and its successors and assigns. (k) "UCC" means the Uniform Commercial Code as from time to time in effect in the State of Texas. SECTION 2. GRANT OF SECURITY INTEREST As collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Obligations, the Debtor hereby grants to the Secured Party a security interest and Bank Lien in all of the following property now owned or at any time hereafter acquired by the Debtor or in which the Debtor now has or at any time in the future may acquire any right, title or interest (collectively, the "Collateral"): (i) all Accounts; (ii) all Contracts; (iii) all Documents; (iv) all Equipment; (v) all Instruments; (vi) all Inventory; and (vii) all Proceeds and all present and future increases, combinations, reclassifications, improvements and products of, accessions, attachments, and other additions to, and substitutes and replacements for all or any part of the foregoing. SECTION 3. DEBTOR'S REPRESENTATIONS AND WARRANTIES The Debtor hereby represents and warrants that: (a) Title; No Other Liens. Except for the Bank Lien granted to the Secured Party for the benefit of the Secured Party pursuant to this Security Agreement and the other Liens permitted to exist on the Collateral pursuant to the Loan Agreement, the Debtor owns each item of the Collateral free and clear of any and all Liens or claims of 3 others. No security agreement, financing statement or other public notice with respect to all or any part of the Collateral is on file or of record in any public office, except (i) such as may have been filed in favor of the Secured Party, for the benefit of the Secured Party, pursuant to this Security Agreement or any other Loan Paper, and (ii) such as may have been filed by third parties to perfect Liens permitted by the Loan Agreement. (b) Perfected First Priority Liens. The Bank ,Liens granted pursuant to this Security Agreement constitute perfected Liens on the Collateral in favor of the Secured Party, which are prior to all other Liens on the Collateral created by the Debtor and in existence on the date hereof and which are enforceable as such against all creditors of and purchasers from the Debtor and against any owner or purchaser of the real property where any of the Collateral is located and any present or future creditor obtaining a Lien on such real property. (c) Accounts. The amount represented by the Debtor to the Secured Party from time to time as owing by each account debtor or by all account debtors in respect of the Accounts will at such time be the correct amount actually owing by such account debtor or debtors thereunder. No amount payable to the Debtor under or in connection with any Account is evidenced by any Instrument which has not been delivered to the Secured Party. Debtor's Accounts arose in the ordinary course of Debtor's business from the performance of services that Debtor has fully and satisfactorily performed or from the sale or lease of goods in which Debtor had sole and complete ownership. No such Account is subject to counterclaim or defense (other than discount for prompt payment as shown on the invoices). (d) Use and Protection of Collateral. The Collateral will be used for business purposes only and certain of the Collateral is of a type normally used in more than one state. (e) Debtor's Address and Location of Collateral. Debtor's chief executive office/chief place of business is located at __________________________________, ________________, Texas ___________. The Collateral will remain in Debtor's possession or control at all times (at Debtor's risk of loss) and will be kept at the locations described on Exhibit A hereto, as the same may be amended or supplemented from time to time. (f) Governmental Obligors. None of the obligors on any Accounts, and none of the parties to any Contracts, is a Governmental Authority. (g) Consents. No consent of any party (other than the Debtor) to any Contract or any obligor in respect of any Account is required, or purports to be required, in connection with the execution, delivery and performance of this Security Agreement. Each Account and each Contract is in full force and effect and constitutes a valid and legally enforceable obligation of the obligor in respect thereof or parties thereto, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditor's rights generally. No consent or authorization of, filing with or other act by or in respect of any Governmental Authority 4 is required in connection with the execution, delivery, performance, validity or enforceability of any of the Accounts or Contracts by any party thereto other than those which have been duly obtained, made or performed, are in full force and effect and do not subject the scope of any such Account or Contract to any material adverse limitation, either specific or general in nature. Neither the Debtor nor (to the best knowledge of the Debtor) any other party to any Account or Contract is in default or is likely to become in default in the performance or observance of any of the terms thereof. The Debtor has fully performed all its obligations under each Contract. The right, title and interest of the Debtor in, to and under each Account or Contract are not subject to any defense, offset, counterclaim, or claim which would materially adversely affect the value of such Account or Contract as Collateral, nor have any of the foregoing been asserted or alleged against the Debtor as to any of the foregoing. Upon request by Secured Party, the Debtor will deliver to the Secured Party a complete and correct copy of each Contract, including all amendments, supplements and other modifications thereto. No account payable to the Debtor under or in connection with any Account or Contract is evidenced by any Instrument which has not been delivered to the Secured Party. (h) Power and Authority; Authorization. The Debtor has the power and authority and the legal right to execute and deliver, to perform its obligations under, and to grant the Bank Liens on the Collateral pursuant to, this Security Agreement and has taken all necessary corporate and other action to authorize its execution, delivery and performance of, and grant of the Bank Liens on the Collateral pursuant to, this Security Agreement. (i) Enforceability. This Security Agreement constitutes a legal, valid and binding obligation of the Debtor enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally. (j) No Conflict. The execution, delivery and performance of this Security Agreement will not violate or constitute a default under (i) any provision of any agreement to which Debtor is a party or by which any of its assets may be bound or subject to, or (ii) the articles of incorporation or by-laws of the Debtor, and (iii) will not result in the creation or imposition of any Lien on any of the properties or revenues of the Debtor except as contemplated hereby. (k) No Consents, Etc. No consent or authorization of, filing with, or other act by or in respect of, any arbitrator or Governmental Authority and no consent of any other person (including, without limitation, any stockholder or creditor or Affiliate of the Debtor), is required in connection with the execution, delivery, performance, validity or enforceability of this Security Agreement. (l) No Litigation. No litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the knowledge of the Debtor, threatened by or against the Debtor or against any of its properties or revenues which could reasonably be expected to have a Material Adverse Effect. 5 SECTION 4. DEBTOR'S COVENANTS The Debtor covenants and agrees with the Secured Party that, from and after the date of this Security Agreement until the Obligations are paid in full: (a) Principal Obligations. Debtor shall pay the Obligations in accordance with the terms thereof and shall otherwise perform all covenants and agreements of Debtor contained in the Loan Agreement, this Security Agreement and in all other Loan Papers. (b) Debtor Remains Liable under Accounts and Contracts. Anything herein to the contrary notwithstanding, the Debtor shall remain liable under each of the Accounts and Contracts to observe and perform all the conditions and obligations to be observed and performed by it thereunder, all in accordance with the terms of any agreements giving rise to each such Account or Contract in accordance with and pursuant to the terms and provisions of each such Contract or agreement giving rise to an Account. (c) Costs. Debtor shall pay Secured Party on demand every expense (including reasonable attorney's fees and other legal expenses) incurred or paid by Secured Party in exercising or protecting its interests, rights, and remedies under this Security Agreement, plus interest at a rate per annum 2% above the Prime Rate on each such amount commencing on the date notice of such expenses is given to Debtor by Secured Party until paid by Debtor. (d) Further Documentation; Pledge of Instruments. At any time and from time to time, upon the written request of the Secured Party, and at the sole expense of the Debtor, the Debtor will promptly and duly execute and deliver such further instruments and documents and take such further action as the Secured Party may reasonably request for the purpose of obtaining or preserving the full benefits of the Loan Agreement and this Security Agreement and of the rights and powers therein and herein granted, including, without limitation, the filing of any financing or continuation statements under the Uniform Commercial Code in effect in any jurisdiction with respect to the Bank Liens created hereby. The Debtor also hereby authorizes the Secured Party to file any such financing or continuation statement without the signature of the Debtor to the extent permitted by applicable law. A carbon, photographic or other reproduction of this Security Agreement shall be sufficient as a financing statement for filing in any jurisdiction. If any amount payable under or in connection with any of the Collateral shall be or become evidenced by any Instrument, such Instrument shall be immediately delivered to the Secured Party, duly endorsed in a manner satisfactory to the Secured Party, to be held as Collateral pursuant to this Security Agreement. (e) Indemnification. The Debtor agrees to pay, and to save the Secured Party harmless from, any and all liabilities, costs and expenses (including, without limitation, legal fees and expenses) (i) with respect to, or resulting from, any delay in paying, any and all excise, sales or other taxes which may be payable or determined to be payable with respect to any of the Collateral, (ii) with respect to, or resulting from, any delay in complying with any law applicable to any of the Collateral or (iii) in connection with any 6 of the transactions contemplated by this Security Agreement. In any suit, proceeding or action brought by the Secured Party under any Account or Contract for any sum owing thereunder, or to enforce any provisions of any Account or Contract, the Debtor will save, indemnify and keep the Secured Party harmless from and against all expense, loss or damage suffered by reason of any defense, setoff, counterclaim, recoupment or reduction or liability whatsoever of the account debtor or obligor thereunder, arising out of a breach by the Debtor of any obligation thereunder or arising out of any other agreement, indebtedness or liability at any time owing to or in favor of such account debtor or obligor or its successors from the Debtor. (f) Maintenance of Records. The Debtor will keep and maintain at its own cost and expense satisfactory and complete records of the Collateral, including, without limitation, a record of all payments received and all credits granted with respect to the Accounts and Contracts. The Debtor will mark its books and records pertaining to the Collateral to evidence this Security Agreement and the security interests granted hereby. For the further security of the Secured Party, the Secured Party shall have a security interest in all of the Debtor's books and records pertaining to the Collateral, and the Debtor shall turn over any such books and records to the Secured Party or to its representatives during normal business hours at the request of the Secured Party. (g) Right of Inspection. The Secured Party shall at all times have full and free access during normal business hours to all the books, correspondence and records of the Debtor, and the Secured Party and its representatives may examine the same, take extracts therefrom and make photocopies thereof, and the Debtor agrees to render to the Secured Party, at the Debtor's cost and expense, such clerical and other assistance as may be reasonably requested with regard thereto. The Secured Party and its representatives shall at all times also have the right to enter into and upon any premises where any of the Collateral is located for the purpose of inspecting the same, observing its use or otherwise protecting its interests therein. (h) Compliance with Laws, Etc. The Debtor will comply in all material respects with all Requirements of Law applicable to the Collateral or any part thereof or to the operation of the Debtor's businesses; provided, however, that the Debtor may contest any Requirement of Law in any reasonable manner which shall not, in the sole opinion of the Secured Party, adversely affect the Secured Party's rights or the priority of its Bank Liens on the Collateral. (i) Compliance with Terms of Contracts, Etc. The Debtor will perform and comply in all material respects with all its obligations under the Contracts and all its other contractual obligations relating to the Collateral. (j) Payment of Obligations. The Debtor will pay promptly when due all taxes, assessments and governmental charges or levies imposed upon the Collateral or in respect of its income or profits therefrom, as well as all claims of any kind (including, without limitation, claims for labor, materials and supplies) against or with respect to the Collateral, except that no such charge need be paid if (i) the validity thereof is being contested in good faith by appropriate proceedings, (ii) such proceedings do not involve 7 any material danger of the sale, forfeiture or loss of any of the Collateral or any interest therein and (iii) such charge is adequately reserved against on the Debtor's books in accordance with generally accepted accounting principles. (k) Limitation of Liens on Collateral. The Debtor will not create, incur or permit to exist, will defend the Collateral against, and will take such other action as is necessary to remove, any Lien or claim on or to the Collateral, other than the Bank Liens created hereby and other than as permitted pursuant to the Loan Agreement, and will defend the right, title and interest of the Secured Party in and to any of the Collateral against the claims and demands of all persons whomsoever. (l) Limitations on Dispositions of Collateral. The Debtor will not sell, transfer, lease or otherwise dispose of any of the Collateral, or attempt, offer or contract to do so, except as expressly permitted in the Loan Agreement. (m) Limitations on Modifications, Waivers, Extensions of Contracts and Agreements Giving Rise to Accounts. The Debtor will not (i) amend, modify, terminate or waive any provision of any Contract or any agreement giving rise to an Account in any manner which could reasonably be expected to materially adversely affect the value of such Contract or Account as Collateral, (ii) fail to exercise promptly and diligently each and every material right which it may have under each Contract and each agreement giving rise to an Account (other than any right of termination) or (iii) fail to deliver to the Secured Party a copy of each material demand, notice or document received by it relating in any way to any Contractor any agreement giving rise to an Account. (n) Limitations on Discounts, Compromises, Extensions of Accounts. Other than in the ordinary course of business as generally conducted by the Debtor over a period of time, the Debtor will not grant any extension of the time of payment of any of the Accounts, compromise, compound or settle the same for less than the full amount thereof, release, wholly or partially, any person liable for the payment thereof, or allow any credit or discount whatsoever thereon. (o) Maintenance of Equipment. The Debtor will maintain each item of Equipment in good operating condition, ordinary wear and tear and immaterial impairments of value and damage by the elements excepted, and will provide all maintenance, service and repairs necessary for such purpose. (p) Maintenance of Insurance. The Debtor will maintain, with financially sound and reputable companies, insurance policies (i) insuring the Equipment and Inventory against loss by fire, explosion, theft and such other casualties as may be reasonably satisfactory to the Secured Party and (ii) insuring the Debtor and the Secured Party against liability for personal injury and property damage relating to such Equipment and Inventory, such policies to be in such form and amounts and having such coverage as may be reasonably satisfactory to the Secured Party, with losses payable to the Debtor and the Secured Party as its interests may appear. All such insurance shall (i) provide that no cancellation, material reduction in amount or material change in coverage thereof shall be effective until at least 30 days after receipt by the Secured Party of written notice 8 thereof, (ii) name the Secured Party as insured party, and (iii) be reasonably satisfactory in all other respects to the Secured Party. The Debtor shall deliver to the Secured Party a report of a reputable insurance broker or agent with respect to such insurance during a month specified by the Secured Party in its discretion in each calendar year and such supplemental reports with respect thereto as the Secured Party may from time to time reasonably request. (q) Further Identification of Collateral. The Debtor will furnish to the Secured Party from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Secured Party may reasonably request, all in reasonable detail. (r) Notices. The Debtor will advise the Secured Party promptly, in reasonable detail, at its address set forth in the Loan Agreement, (i) of any Lien (other than Bank Liens created hereby or permitted under the Loan Agreement) on, or claim asserted against, any of the Collateral and (ii) of the occurrence of any other event which could reasonably be expected to have a material adverse effect on the aggregate value of the Collateral or on the Bank Liens created hereunder. (s) Changes in Locations, Name, Etc. The Debtor will not (i) change the location of its chief executive office/chief place of business from that specified in Section 3 or (ii) change its name, identity or organizational structure to such an extent that any financing statement filed by the Secured Party in connection with this Security Agreement would become misleading. (t) Removal of Collateral from One State to Another State. At least three days prior to the removal of any Collateral from the State of Texas to any other state, the Debtor will advise the Secured Party in writing of such intended removal. With reference to any such removal, the Debtor shall take all steps required to perfect, protect, preserve and maintain the interest of the Secured Party in the Collateral; provided, however, that the Secured Party consents that the Debtor may, in the ordinary course of its business and without prior notice to the Secured Party, temporarily remove the Collateral or any part thereof from the State of Texas for a period not to exceed thirty days. SECTION 5. PERFORMANCE BY SECURED PARTY OF DEBTOR'S AGREEMENTS If the Debtor fails to perform or comply with any of the agreements contained herein and the Secured Party, as provided for by the terms of this Security Agreement, shall itself perform or comply, or otherwise cause performance or compliance, with such agreement, the expenses of the Secured Party incurred in connection with such performance or compliance, together with interest thereon at a rate per annum 2% above the Prime Rate, shall be payable by the Debtor to the Secured Party on demand and shall constitute Obligations secured hereby. SECTION 6. SECURED PARTY'S APPOINTMENT AS ATTORNEY-IN-FACT (a) Attorney-in-Fact. Debtor hereby irrevocably constitutes and appoints the Secured Party and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and 9 stead, of the Debtor and in the name of the Debtor or in its own name, from time to time in the Secured Party's discretion, for the purpose of carrying Out the terms of this Security Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Security Agreement, and, without limiting the generality of the foregoing, the Debtor hereby gives the Secured Party the power and right, on behalf of the Debtor, without notice to or assent by the Debtor, to do the following: (1) in the case of any Account, at any time when the authority of the Debtor to collect the Accounts has been curtailed or terminated pursuant to the first sentence of Section 9(c) hereof, or in the case of any other Collateral, at any time when any Event of Default shall have occurred and is continuing, in the name of the Debtor or its own name, or otherwise, to take possession of and indorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under, or with respect to, any Collateral and to file any claim or to take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by the Secured Party for the purpose of collecting any and all such moneys due or with respect to such Collateral whenever payable; (2) to pay or discharge taxes and Liens levied or placed on or threatened against the Collateral, to effect any repairs or any insurance called for by the terms of this Security Agreement and to pay all or any part of the premiums therefore and the costs thereof; and (3) upon the occurrence and during the continuance of any Event of Default, (a) to direct any party liable for any payment under any of the Collateral to make payment of any and all moneys due or to become due thereunder directly to the Secured Party or as the Secured Party shall direct; (b) to ask for or demand, collect, receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral; (c) to sign and indorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications, notices and other documents in connection with any of the Collateral; (d) to commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any thereof and to enforce any other right in respect of any Collateral; (e) to defend any suit, action or proceeding brought against the Debtor with respect to any Collateral; (f) to settle, compromise or adjust any suit, action or proceeding described in the preceding clause and, in connection therewith, to give such discharges or releases as the Secured Party may deem appropriate; and (g) generally, to sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Secured Party were the absolute owner thereof for all purposes, and to do, at the Secured Party's option and the Debtor's expense, at any time, or from time to time, all acts and things which the Secured Party deems necessary to protect, preserve or realize upon the Collateral and the Bank Liens of the Secured Party 10 thereon and to effect the intent of this Security Agreement, all as fully and effectively as the Debtor might to. The Debtor hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and shall be irrevocable. (b) Other Powers. The Debtor also authorizes the Secured Party, at any time and from time to time, to execute, in connection with the sale provided for in Sections 6(a) and 9(d),any endorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral. SECTION 7. PROCEEDS In addition to the rights of the Secured Party specified in Section 9 with respect to payments of Accounts, it is agreed that if an Event of Default shall occur and be continuing (i) all Proceeds received by the Debtor consisting of cash, checks and other near-cash items shall be held by the Debtor, in trust for the Secured Party, segregated from other funds of the Debtor, and shall, forthwith upon receipt by the Debtor, be turned over to the Secured Party in the exact form received by the Debtor (duly indorsed by the Debtor to the Secured Party), and (ii) any and all such Proceeds received by the Secured Party (whether from the Debtor or otherwise) may, in the sole discretion of the Secured Party, be held by the Secured Party for the Secured Party as collateral security for, and/or then or at any time thereafter may be applied by the Secured Party against, the Obligations (whether matured or unmatured), such application to be in such order as the Secured Party shall elect. Any balance of such Proceeds remaining after the Obligations shall have been paid in full shall be paid over to the Debtor or to whomsoever may be lawfully entitled to receive the same. SECTION 8. EVENTS OF DEFAULT If any one or more of the following shall occur and shall not have been remedied in the period, if any, provided for, an "Event of Default" shall be deemed to have occurred hereunder and with respect to all of the Obligations, unless waived in writing by Secured Party: (a) default shall be made by Debtor in the payment when due of any installment of principal or interest on the Notes or any other Obligations; (b) any representation or warranty made by Debtor in this Security Agreement, or by Debtor in the Loan Agreement or in any of the other Loan Papers or in any certificate, document or financial or other statement furnished to Secured Party under or in connection with this Security Agreement, the Loan Agreement or any other Loan Paper shall be or shall prove to have been incorrect or untrue or misleading in any material respect on or as of the date made or deemed made and shall continue unremedied for a period of 30 days after the earlier of (i) the Debtor becoming aware of such default or (ii) the Secured Party giving notice thereof to the Debtor; (c) default shall be made by Debtor in the due performance or observance of any covenant, condition or agreement contained in this Security Agreement, or default 11 shall be made by Debtor in the due performance or observance of any covenant, condition or agreement contained in the Loan Agreement or in any of the other Loan Papers and such default shall continue unremedied for a period of 30 days after the earlier of (i) Debtor becoming aware of such default or (ii) the Secured Party giving notice thereof to the Debtor; (d) Debtor shall (i) apply for or consent to the appointment of a receiver, trustee or liquidator of Debtor or of all or a substantial part of Debtor's assets; (ii) be unable, or admit in writing its inability, or fail to confirm its ability (when requested to do so by Secured Party) to pay its debts as they become due; (iii) make a general assignment for the benefit of creditors; (iv) be adjudicated a bankrupt or insolvent or file a voluntary petition in bankruptcy; (v) file a petition or an answer seeking reorganization or an arrangement with creditors or to take advantage of any bankruptcy or insolvency law; (vi) file an answer admitting the material allegations of, or consent to, or default in answering, a petition filed against it in any bankruptcy, reorganization or insolvency proceedings; or (vii) take any action for the purpose of effecting any of the foregoing; (e) an order, judgment or decree shall be entered by any court of competent jurisdiction approving a petition seeking reorganization of Debtor or appointing a receiver, trustee or liquidator of Debtor or of all or a substantial part of its assets, and such order, judgment or decree shall continue unstayed in effect for any period of 30 consecutive days; (f) the failure of Debtor to have discharged within a period of 30 days after the commencement thereof any attachment, sequestration or similar proceeding against any of its properties or assets having a value of $100,000.00 or more; (g) any acceleration, notice of default, filing of suit or notice of breach by any lender, lessor, creditor or other party to any Material Agreement to which Debtor is a party, or to which its properties or assets are subject; (h) the occurrence of a Material Adverse Effect with respect to Debtor; (i) the occurrence of a Change of Control; (j) final judgment or judgments shall be entered against Borrower involving in the aggregate a liability (not paid or fully covered by insurance or not otherwise covered by indemnity agreements acceptable to Lender in its sole discretion) of $ 50,000.00 or more, and such judgment or judgments shall not have been vacated, discharged, stayed or bonded pending appeal within 60 days from the entry thereof; or (k) the occurrence of any other Event of Default under the Loan Agreement. SECTION 9. SECURED PARTY'S RIGHTS, REMEDIES AND POWERS (a) Analysis of Accounts. The Secured Party shall have the right to make test verifications of the Accounts in any manner and through any medium that it reasonably considers advisable, and the Debtor shall furnish all such assistance and information as 12 the Secured Party may require in connection therewith. At any time and from time to time, upon the Secured Party's request and at the expense of the Debtor, the Debtor shall cause independent public accountants or others satisfactory to the Secured Party to furnish to the Secured Party reports showing reconciliations, aging and test verifications of, and trial balances for, the Accounts. (b) Notice to Account Debtors and Contracting Parties. Upon the request of the Secured Party at any time, the Debtor shall notify account debtors of the Accounts and parties to the Contracts that the Accounts and the Contracts have been assigned to the Secured Party and that payments in respect thereof shall be made directly to the Secured Party. The Secured Party may in its own name or in the name of others communicate with account debtors on the Accounts and parties to the Contracts to verify with them to its satisfaction the existence, amount and terms of any Accounts or Contracts. (c) Collections on Accounts and Contracts. The Secured Party hereby authorizes the Debtor to collect the Accounts and Contracts, subject to the Secured Party's direction and control, and the Secured Party may curtail or terminate said authority at any time. If required by the Secured Party at any time, any payments of Accounts and Contracts, when collected by the Debtor, shall be forthwith (and, in any event, within two Business Days) deposited by the Debtor in the exact form received, duly indorsed by the Debtor to the Secured Party if required, in a special collateral account maintained by the Secured Party, subject to withdrawal by the Secured Party for the account of the Secured Party only, as provided in this Security Agreement, and, until so turned over, shall be held by the Debtor in trust for the Secured Party, segregated from other funds of the Debtor. All Proceeds while held by the Secured Party (or by the Debtor in trust for the Secured Party) shall continue to be collateral security for all of the Obligations and shall not constitute payment thereof until applied as provided in this Security Agreement. At such intervals as may be agreed upon by the Debtor and the Secured Party, or, if an Event of Default shall have occurred and be continuing, at any time at the Secured Party's election, the Secured Party shall apply all or any part of the funds on deposit in said special collateral account on account of the Obligations in such order as the Secured Party may elect, and any part of such funds which the Secured Party elects not so to apply and deems not required as collateral security for the Obligations shall be paid over from time to time by the Secured Party to the Debtor or to whomsoever may be lawfully entitled to receive the same. At the Secured Party's request, the Debtor shall deliver to the Secured Party all original and other documents evidencing, and relating to, the agreements and transactions which gave rise to the Accounts and Contracts, including, without limitation, all original orders, invoices and shipping receipts. (d) Remedies; Acceleration of Maturity of Obligations; Repossession and Sale of Collateral. At any time after an Event of Default occurs and is continuing, Secured Party may declare every Obligation to be immediately due and payable and may exercise, in addition to all other rights and remedies granted to it in this Security Agreement, the Loan Agreement and in any of the other Loan Papers securing, evidencing or relating to the Obligations, all rights and remedies of a secured party under the UCC. Without limiting the generality of the foregoing, the Secured Party, without demand of 13 performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon the Debtor or any other person (all and each of which demands, defenses, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any party thereof, and/or may forthwith sell, lease, assign, give option or options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, at any exchange, broker's board or office of the Secured Party or elsewhere upon such terms and conditions as Secured Party may deem advisable and at such prices as Secured Party may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Secured Party shall have the right upon any such public sale or sales, and, to the extent permitted bylaw, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in the Debtor, which right or equity is hereby waived or released. The Debtor further agrees, at the Secured Party's request, to assemble the Collateral and make it available to the Secured Party at places which the Secured Party shall reasonably select, whether at the Debtor's premises or elsewhere. The Secured Party shall apply the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred therein or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Secured Party hereunder, including, without limitation, reasonable attorneys' fees and disbursements, to the payment in whole or in part of the Obligations, in such order as the Secured Party may elect, and only after such application and after the payment by the Secured Party of any other amount required by any provision of law, need the Secured Party account for the surplus, if any, to the Debtor. To the extent permitted by applicable law, the Debtor waives all claims, damages and demands it may acquire against the Secured Party arising out of the exercise by it of any rights hereunder. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least 10 days before such sale or other disposition. The Debtor shall remain liable for any deficiency if the proceeds of any sale or other disposition of the Collateral are insufficient to pay the Obligations and the fees and disbursements of any attorneys employed by the Secured Party to collect such deficiency. (e) Right of Setoff. In addition to the security interest and Lien herein described, Debtor expressly recognizes and grants Secured Party upon the occurrence of an Event of Default the right of setoff with respect to any money, checks, certificates of deposit or instruments deposited with Secured Party, whether in general or special deposits, which right may be exercised concurrently with or separately from any and all other rights of Secured Party against Debtor. SECTION 10. LIMITATIONS ON SECURED PARTY'S DUTIES AND OBLIGATIONS (a) Limitations on Secured Party's Obligations Under Accounts and Contracts. The Secured Party shall not have any obligation or liability under any Account (or any agreement giving rise thereto) or Contract by reason of or arising out of 14 this Security Agreement or the receipt by the Secured Party of any payment relating to such Account or Contract pursuant hereto, nor shall the Secured Party be obligated, in any manner to perform any of the obligations of the Debtor thereof under or pursuant to any Account (or any agreement giving rise thereto) or under or pursuant to any Contract, to make any payment, to make any inquiry as to the nature or the sufficiency of any payment received by it or as to the sufficiency of any performance by any party under any Account (or any agreement giving rise thereto) or under any Contract, to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times. (b) Limitation on Duties Regarding Preservation of Collateral. The Secured Party's sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the UCC or otherwise, shall be to deal with it in the same manner as the Secured Party deals with similar property for its own account. Neither the Secured Party nor any of its directors, officers, employees or agents shall be liable for failure to demand, collect or realize upon all or any part of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of the Debtor or otherwise. (c) No Duty on the Part of Secured Party. The powers conferred on the Secured Party under this Security Agreement are solely to protect the interests of the Secured Party in the Collateral and shall not impose any duty upon the Secured Party to exercise any such powers. The Secured Party shall be accountable only for amounts that it actually receives as a result of the exercise of such powers, and neither it nor any of its officers, directors, employees or agents shall be responsible to the Debtor or its officers, directors, employees, stockholders or agents for any act or failure to act hereunder, except for its own gross negligence or willful misconduct. SECTION 11. GENERAL PROVISIONS (a) Powers Coupled with an Interest. All authorizations and agencies herein contained with respect to the Collateral are irrevocable and powers coupled with an interest. (b) Severability. Any provision of this Security Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. (c) Additional Definitions. The term "Debtor" as used in this Security Agreement is to be construed as singular or plural to correspond with the number of persons executing this instrument as Debtor. The pronouns used in this instrument are in the masculine gender but shall be construed as feminine or neuter as occasion may require. "Secured Party" and "Debtor" as used in this instrument include the heirs, 15 executors or administrators, successors, representatives, receivers, trustees, custodians, and assigns of those parties. (d) Captions. The section and paragraph headings appearing in this instrument were inserted for convenience only and are not to be given any substantive meaning or significance in construing this Security Agreement. (e) Waivers and Amendments; Successors and Assigns. None of the terms or provision of this Security Agreement may be waived, amended, supplemented or otherwise modified except by a written instrument executed by the Debtor and the Secured Party, provided that any provision of this Security Agreement may be waived by the Secured Party in a written letter or agreement executed by the Secured Party or by telex or facsimile transmission from the Secured Party. This Security Agreement shall be binding upon the permitted successors and assigns of the Debtor and shall inure to the benefit of the Secured Party and its successors and assigns. (f) No Waiver; Cumulative Remedies. The Secured Party shall not by any act (except by a written instrument pursuant to Section 11(e) hereof), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Event of Default or in any breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of the Secured Party, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Secured Party of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Secured Party would otherwise have on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any rights or remedies provided by law. (g) GOVERNING LAW. THE LAW GOVERNING THIS SECURED TRANSACTION SHALL BE CONSTRUED IN ACCORDANCE WITH, AND GOVERNED BY, THE LAWS OF THE STATE OF TEXAS; PROVIDED, HOWEVER, THAT THE RIGHTS OF THE PARTIES HERETO WITH RESPECT TO ANY OF THE COLLATERAL SITUATED IN ANY OTHER STATE MAY BE GOVERNED BY THE LAWS OF SUCH OTHER STATE. (h) Renewal, Extension or Rearrangement. All provisions of this Security Agreement and of any other Loan Paper relating to the Notes or other Obligations shall apply with equal force and effect to each and all promissory notes hereafter executed which in whole or in part represent a renewal, extension for any period, increase or rearrangement of any part of the Obligations originally represented by the Notes or any part of such other Obligations. (i) Assignment. Secured Party may from time to time assign this Security Agreement, Secured Party's rights under this Security Agreement, or all or any of the Obligations. In any such case, the assignee will be entitled to all rights, privileges, and 16 remedies granted in this Security Agreement to Secured Party, and Debtor will not assert against the assignee any claims or defenses Debtor may have against Secured Party (except those granted in this Security Agreement). (j) Notices. Notices hereunder may be given by mail, by telex or by facsimile transmission, addressed or transmitted to the person to which it is being given at such person's address or transmission number set forth in the Loan Agreement and shall be effective (a) in the case of mail, two days after deposit in the postal system, first class postage prepaid and (b) in the case of telex or facsimile notices, when sent. The Debtor may change its address and transmission number by written notice to the Secured Party, and the Secured Party may change its address and transmission number by written notice to the Debtor. EXECUTED the date first above written, in Midland, Texas. SECURED PARTY WESTERN NATIONAL BANK By: ----------------------------------------- Scott A. Lovett, Executive Vice President DEBTOR NATURAL GAS SERVICES GROUP, INC. By: ---------------------------------------- -------------------------------------------- -------------------------------------------- 17 GUARANTY AGREEMENT This GUARANTY AGREEMENT (this "Guaranty"), dated as of September ____, 1999, is made by ____________________________, a Texas _________________ (the "Company Guarantor"), for the benefit of WESTERN NATIONAL BANK, a national banking association ("Lender"). WITNESSETH: WHEREAS, Lender has entered into a Loan Agreement (as the same may hereafter be amended, restated or otherwise modified from time to time, the "Loan Agreement"), dated of even date herewith, with Natural Gas Services Group, Inc, a Texas corporation ("Borrower"), pursuant to which Borrower has executed that certain Term Promissory Note in the original principal amount of $1,500,000.00 and that certain Revolving Line of Credit Promissory Note in the original principal amount of $750,000.00 (together with all renewals, refinancings, modifications, increases and extensions thereof, the "Notes") under which Borrower has become indebted, and may from time to time be further indebted, to Lender with respect to loans (the "Loans") which are further evidenced, secured or governed by other instruments and security documents executed in connection with the Loans (collectively, the "Security Documents"); and WHEREAS, Lender is not willing to make the Loans, or otherwise extend credit, to Borrower unless Company Guarantor guarantees payment to Lender of the Guaranteed Debt (as herein defined) pursuant to the following terms; and WHEREAS, Company Guarantor will directly benefit from Lender's making the Loan to Borrower. NOW, THEREFORE, as a material inducement to Lender to enter into the Loan Agreement and to make the Loan to Borrower thereunder, and to extend such additional credit as Lender may from time to time agree to extend thereunder, and for other good and valuable consideration, the receipt and legal sufficiency of which are hereby acknowledged, the parties do hereby agree as follows: ARTICLE 1. NATURE AND SCOPE OF GUARANTY 1.01 Definition of Guaranteed Debt. As used herein, the term "Guaranteed Debt" means all of the following: (a) all principal, interest, attorneys' fees, liabilities for costs and expenses and other indebtedness, obligations- and liabilities of Borrower to Lender at any time created or arising in connection with the Loans, or any amendment thereto or substitution therefor, including, but not limited to, all indebtedness, obligations and liabilities of Borrower to Lender arising under the Notes, or under any renewals, modifications, increases and extensions of the Notes, or under the Loan Agreement and the Security Documents; (b) all liabilities of Borrower for future advances, extensions of credit or other value at any time given or made by Lender to Borrower arising under the Loan Agreement and the Security Documents; (c) any and all other indebtedness, liabilities, obligations and duties of every kind and character of Borrower to Lender arising under the Loan Agreement and the Security Documents, whether now or hereafter existing or arising, regardless of whether such present or future indebtedness, liabilities, obligations or duties be direct or indirect, related or unrelated, liquidated or unliquidated, primary or secondary, joint, several, or joint and several, or fixed or contingent; (d) any and all post-petition interest and expenses (including attorneys' fees) whether or not allowed under any bankruptcy, insolvency, or other similar law; and (e) all costs, expenses and fees, including, but not limited to, court costs and attorneys' fees, arising in connection with the collection of any or all amounts, indebtedness, obligations and liabilities of Borrower to Lender described in items (a) through (d) of this Section 1.01. 1.02 Guaranty of Obligation. Company Guarantor hereby irrevocably and unconditionally guarantees to Lender and its successors and assigns the payment and performance of the Guaranteed Debt as and when the same shall be due and payable, whether by lapse of time, by acceleration of maturity or otherwise. Company Guarantor hereby irrevocably and unconditionally covenants and agrees that it is liable for the Guaranteed Debt as a primary obligor. 1.03 Nature of Guaranty. This Guaranty is an irrevocable, absolute, continuing guaranty of payment and performance and not a guaranty of collection. This Guaranty may not be revoked by Company Guarantor and shall continue to be effective with respect to any Guaranteed Debt arising or created after any attempted revocation by Company Guarantor and after such Company Guarantor's dissolution (in which event this Guaranty shall be binding upon such Company Guarantor's successors and assigns). This Guaranty may be enforced by Lender and any subsequent holder of the Guaranteed Debt and shall not be discharged by the assignment or negotiation of all or part of the Guaranteed Debt. 1.04 Guaranteed Debt Not Reduced by Offset. The Guaranteed Debt and the liabilities and obligations of Company Guarantor to Lender hereunder, shall not be reduced, discharged or released because or by reason of any existing or future offset, claim or defense of Borrower, or any other party, against Lender or against payment of the Guaranteed Debt, whether such offset, claim or defense arises in connection with the Guaranteed Debt (or the transactions creating the Guaranteed Debt) or otherwise. Without limiting the foregoing or Company Guarantor's liability hereunder, to the extent that Lender advances funds pursuant to the Notes and does not receive payments or benefits thereon in the amounts and at the times required or provided in the 2 Notes, Company Guarantor is absolutely liable to make such payments to (and confer such benefits on) Lender, on a timely basis. 1.05 Payment by Comfy Guarantor. If all or any part of the Guaranteed Debt shall not be punctually paid when due, whether at maturity or earlier by acceleration or otherwise, Company Guarantor shall, immediately upon demand by Lender, and without presentment, protest, notice of protest, notice of non-payment, notice of intention to accelerate the maturity, notice of acceleration of the maturity, or any other notice whatsoever, pay in lawful money of the United States of America, the amount due on the Guaranteed Debt to Lender at Lender's address as set forth herein. Such demand(s) may be made at any time coincident with or after the time for payment of all or part of the Guaranteed Debt, and may be made from time to time with respect to the same or different items of Guaranteed Debt. Such demand shall be deemed made, given and received in accordance with the notice provisions hereof. 1.06 No Duty to Pursue Others. It shall not be necessary for Lender (and Company Guarantor hereby waives any rights which such Company Guarantor may have to require Lender), in order to enforce such payment by Company Guarantor, first to (i) institute suit or exhaust its remedies against Borrower or others liable on the Guaranteed Debt or any other person, (ii) enforce Lender's rights against any collateral which shall ever have been given to secure the Guaranteed Debt, (iii) join Borrower or any others liable on the Guaranteed Debt in any action seeking to enforce this Guaranty, (iv) exhaust any remedies available to Lender against any collateral which shall ever have been given to secure the Guaranteed Debt, or (v) resort to any other means of obtaining payment of the Guaranteed Debt. Lender shall not be required to mitigate damages or take any other action to reduce, collect or enforce the Guaranteed Debt. 1.07 Waivers. Company Guarantor agrees to the provisions of the Loan Agreement and the Security Documents, and hereby waives (a) all rights of Company Guarantor under Rule 31, Texas Rules of Civil Procedure, or Chapter 34 of the Texas Business and Commerce Code, or Section 17.001 of the Texas Civil Practice and Remedies Code; (b) to the extent Company Guarantor is subject to the Texas Revised Partnership Act ("TRPA"), compliance by Lender with Section 3.05(d) of TRPA and(c) notice of (i) any loans or advances made by Lender to Borrower, (ii) acceptance of this Guaranty, (iii) any amendment or extension of the Notes, the Loan Agreement or of any other Security Documents, (iv) the execution and delivery by Borrower and Lender of any other loan or credit agreement or of Borrower's execution and delivery of any promissory notes or other documents arising under the Loan Agreement, the Security Documents or in connection with the Collateral (as defined in the Loan Agreement or Security Documents), (v) the occurrence of any breach by Borrower or Event of Default (as defined in the Loan Agreement), (vi) Lender's transfer or disposition of the Guaranteed Debt, or any part thereof, (vii) sale or foreclosure (or posting or advertising for sale or foreclosure) of any collateral for the Guaranteed Debt, (viii) protest, proof of non-payment or default by Borrower, or (ix) any other action at any time taken or omitted by Lender, and, generally, all demands and notices of every kind in connection with this Guaranty, the Loan Agreement, the Security Documents, or any other documents or agreements evidencing, securing or relating to any of the Guaranteed Debt and the obligations hereby guaranteed. The parties intend that Company Guarantor shall not be considered a "debtor" as defined in Tex. Bus. & Com. Code Ann. Section 9.105 (and any successor statute thereto). 3 If any part of the Guaranteed Debt is secured by an interest in real property ("Real Property"), and such interest is foreclosed upon pursuant to a judicial or nonjudicial foreclosure sale, Company Guarantor agrees that notwithstanding the provisions of Section 51.003, 51.004, and 51.005 of the Texas Property Code (as amended from time to time), and to the extent permitted bylaw, Lender may seek a deficiency judgment from Company Guarantor and any other party obligated on the Guaranteed Debt equal to the difference between the amount owing on the Guaranteed Debt and the amount for which the Real Property was sold at judicial or nonjudicial foreclosure sale. 1.08 Payment of Expenses. If Company Guarantor breaches or fails to timely perform any provisions of this Guaranty, Company Guarantor shall, immediately upon demand by Lender, pay Lender all costs and expenses (including court costs and reasonable attorneys' fees) incurred by Lender in the enforcement hereof or the preservation of Lender's rights hereunder. The covenant contained in this Section 1.08 shall survive the payment of the Guaranteed Debt. 1.09 Effect of Bankruptcy. If, pursuant to any insolvency, bankruptcy, reorganization, receivership or other debtor relief law, or any judgment, order or decision thereunder, Lender must rescind or restore any payment, or any part thereof, received by Lender in satisfaction of the Guaranteed Debt, as set forth herein, any prior release or discharge from the terms of this Guaranty given to Company Guarantor by Lender shall be without effect, and this Guaranty shall remain in full force and effect. It is the intention of Borrower and Company Guarantor that Company Guarantor's obligations hereunder shall not be discharged except by Company Guarantor's performance of such obligations and then only to the extent of such performance. 1.10 Waiver of Subrogation, Reimbursement and Contribution. Not withstanding anything to the contrary contained in this Guaranty, from and after the date hereof until payment to Lender in full of the Guaranteed Debt, Company Guarantor shall not, and shall not attempt to, enforce, collect or exercise any rights Company Guarantor may now or hereafter have under any agreement, at law or in equity (including, without limitation, any law subrogating the Company Guarantor to the rights of Lender) to assert any claim against or seek contribution, indemnification or any other form of reimbursement from Borrower or any other party liable for payment of any or all of the Guaranteed Debt for any payment made by Company Guarantor under or in connection with this Guaranty or otherwise. After payment to Lender in full of the Guaranteed Debt, Lender shall not contest the subrogation of Company Guarantor to the rights of Lender under the Security Documents, it being expressly agreed that Company Guarantor's rights under such subrogation shall be and remain subordinate and inferior to the rights of Lender under the Security Documents until and unless all amounts due Lender by Borrower under the Security Documents shall be paid in full. 1.11 Borrower. The term "Borrower" as used herein shall include any new or successor corporation, association, partnership (general or limited), joint venture, trust or other individual or organization formed as a result of any merger, consolidation, reorganization, amalgamation, sale, transfer or gift of Borrower or any interest in Borrower. 4 ARTICLE 2. EVENTS AND CIRCUMSTANCES NOT REDUCING OR DISCHARGING COMPANY GUARANTOR'S OBLIGATIONS Company Guarantor hereby consents and agrees to each of the following, and agrees that Company Guarantor's obligations under this Guaranty shall not be released, diminished, impaired, reduced or adversely affected by any of the following, and waives any common law, equitable, statutory or other rights (including, without limitation, rights to notice) which Company Guarantor might otherwise have as a result of or in connection with any of the following: 2.01 Modifications. Any renewal, refinancing, extension, increase, modification, alteration or rearrangement of all or any part of the Guaranteed Debt, the Notes, the Loan Agreement, the Security Documents, or any other document, instrument, contract or understanding between Borrower and Lender, or any other parties, pertaining to the Guaranteed Debt or any failure of Lender to notify Company Guarantor of any such action. 2.02 Adjustment. Any adjustment, indulgence, forbearance or compromise that might be granted or given by Lender to Borrower or Company Guarantor. 2.03 Condition of Borrower or Company Guarantor. The insolvency, bankruptcy, arrangement, adjustment, composition, liquidation, disability, death, dissolution or lack of power of Borrower, Company Guarantor or any other party at any time liable for the payment of all or part of the Guaranteed Debt; or any changes in the shareholder, partners or members of Borrower or Company Guarantor; or any reorganization of Borrower or Company Guarantor. 2.04 Invalidity of Guaranteed Debt. The invalidity, illegality or unenforceability of all or any part of the Guaranteed Debt, or any document or agreement executed in connection with the Guaranteed Debt, for any reason whatsoever, including, without limitation, the fact that (i) the Guaranteed Debt, or any part thereof, exceeds the amount permitted by law, (ii) the act of creating the Guaranteed Debt or any part thereof is ultra vires, (iii) the officers or representatives executing the Notes, the Loan Agreement or the other Security Documents or otherwise creating the Guaranteed Debt acted in excess of their authority, (iv) the Guaranteed Debt violates applicable usury laws, (v) the Borrower has valid defenses, claims or offsets (whether at law, in equity or by agreement) which render the Guaranteed Debt wholly or partially uncollectible from Borrower, (vi) the creation, performance or repayment of the Guaranteed Debt (or the execution, delivery and performance of any document or instrument representing part of the Guaranteed Debt or executed in connection with the Guaranteed Debt, or given to secure the repayment of the Guaranteed Debt) is illegal, uncollectible or unenforceable, or (vii) the Notes, the Loan Agreement or any of the other Security Documents have been forged or otherwise are irregular or not genuine or authentic, it being agreed that Company Guarantor shall remain liable hereon regardless of whether Borrower or any other person be found not liable on the Guaranteed Debt or any part thereof for any reason. 2.05 Release of Obligors. Any full or partial release of the liability of Borrower on the Guaranteed Debt, or any part thereof, or any other person or entity now or hereafter liable, whether directly or indirectly, jointly, severally, or jointly and severally, to pay, perform, 5 guarantee or assure the payment of the Guaranteed Debt, or any part thereof, it being recognized, acknowledged and agreed by Company Guarantor that Company Guarantor may be required to pay the Guaranteed Debt without assistance or support of any other party, and Company Guarantor has not been induced to enter into this Guaranty on the basis of a contemplation, belief, understanding or agreement that other parties will be liable to pay or perform the Guaranteed Debt, or that Lender will look to other parties to pay or perform the Guaranteed Debt. 2.06 Other Collateral. The taking or accepting of any other security, collateral or guaranty, or other assurance of payment, for all or any part of the Guaranteed Debt. 2.07 Release of Collateral. Any release, surrender, exchange, subordination, deterioration, waste, loss or impairment (including, without limitation, negligent, willful, unreasonable or unjustifiable impairment) of any collateral, property or security, at any time existing in connection with, or assuring or securing payment of, all or any part of the Guaranteed Debt. 2.08 Care and Diligence. The failure of Lender or any other party to exercise diligence or reasonable care in the preservation, protection, enforcement, sale or other handling or treatment of all or any part of such collateral, property or security, including, but not limited to, any neglect, delay, omission, failure or refusal of Lender (i) to take or prosecute any action for the collection of any of the Guaranteed Debt or (ii) to foreclose, or initiate any action to foreclose, or, once commenced, prosecute to completion any action to foreclose upon any security therefor, or (iii) to take or prosecute any action in connection with any instrument or agreement evidencing or securing all or any part of the Guaranteed Debt. 2.09 Unenforceability. The fact that any collateral, security, security interest or lien contemplated or intended to be given, created or granted as security for the repayment of the Guaranteed Debt, or any part thereof, shall not be properly perfected or created, or shall prove to be unenforceable or subordinate to any other security interest or lien, it being recognized and agreed by Company Guarantor that it is not entering into this Guaranty in reliance on, or in contemplation of the benefits of, the validity, enforceability, collectibility or value of any of the collateral for the Guaranteed Debt. 2.10 Offset. The Notes, the Guaranteed Debt and the liabilities and obligations of Company Guarantor to Lender hereunder shall not be reduced, discharged or released because of or by reason of any existing or future right of offset, claim or defense of Borrower against Lender, or any other party, or against payment of the Guaranteed Debt, whether such right of offset, claim or defense of Borrower against Lender, or any other party, or against payment of the Guaranteed Debt, whether such right of offset, claim or defense arises in connection with the Guaranteed Debt (or the transactions creating the Guaranteed Debt) or otherwise. 2.11 Merger. The reorganization, conversion, merger, amalgamation or consolidation of Borrower into or with any other corporation or entity. 6 2.12 Preference. Any payment by Borrower to Lender is held to constitute a preference under bankruptcy laws, or for any reason Lender is required to refund such payment or pay such amount to Borrower or someone else. 2.13 Other Actions Taken or Omitted. Any other action taken or omitted to be taken with respect to the Loan Agreement, the Security Documents, the Guaranteed Debt, or the security and collateral therefor, whether or not such action or omission prejudices Company Guarantor or increases the likelihood that Company Guarantor-will be required to pay the Guaranteed Debt pursuant to the terms hereof, it being the unambiguous and unequivocal intention of Company Guarantor that it shall be obligated to pay the Guaranteed Debt when due, notwithstanding any occurrence, circumstance, event, action, or omission whatsoever, whether contemplated or uncontemplated, and whether or not otherwise or particularly described herein, which obligation shall be deemed satisfied only upon the full and final payment and satisfaction of the Guaranteed Debt. ARTICLE 3. REPRESENTATIONS AND WARRANTIES As material inducements to Lender to enter into the Loan Agreement and the Security Documents and extend credit to Borrower, Company Guarantor represents and warrants to Lender as follows: 3.01 Benefit. Company Guarantor is the owner of a direct or indirect interest in Borrower, or has received, or will receive, direct or indirect benefit from the making of this Guaranty with respect to the Guaranteed Debt. 3.02 Familiarity and Reliance. Company Guarantor is familiar with, and has independently reviewed books and records regarding, the financial condition of the Borrower and is familiar with the value of any and all collateral intended to be created as security for the payment of the Notes or Guaranteed Debt; provided, however, Company Guarantor is not relying on such financial condition or the collateral as an inducement to enter into this Guaranty. 3.03 No Representation by Lender. Neither Lender nor any other party has made any representation, warranty or statement to Company Guarantor in order to induce the Company Guarantor to execute this Guaranty. 3.04 Company Guarantor's Financial Condition. As of the date hereof, and after giving effect to this Guaranty and the contingent obligation evidenced hereby, Company Guarantor is, and will be, solvent, and has and will have assets which, fairly valued, exceed Company Guarantor's obligations, liabilities (including contingent liabilities) and debts, and has and will have property and assets sufficient to satisfy and repay its-obligations and liabilities. 3.05 Legality. All action on Company Guarantor's part requisite for the due execution, delivery and performance of this Guaranty and the other Security Documents to which Company Guarantor is a party has been duly and effectively taken. The execution, delivery and performance by Company Guarantor of this Guaranty and the consummation of the transactions contemplated hereunder do not, and will not, contravene or conflict with any law, statute or regulation whatsoever to which Company Guarantor is subject or constitute a default (or an event 7 which with notice or lapse of time or both would constitute a default) under, or result in the breach of, any indenture, mortgage, deed of trust, charge, lien, or any contract, agreement or other instrument to which Company Guarantor is a party or which may be applicable to Company Guarantor. This Guaranty is a legal and binding obligation of Company Guarantor and is enforceable in accordance with its terms, except as limited by bankruptcy, insolvency or other laws of general application relating to the enforcement of creditors' rights. 3.06 Financial Statements. Each financial statement of Company Guarantor delivered heretofore, concurrently herewith or hereafter to Lender completely and accurately discloses the financial condition of Company Guarantor (including all contingent liabilities) as of the date thereof and for the period covered thereby, and there has been no material adverse change in Company Guarantor's financial condition subsequent to the date of the most recent financial statement of Company Guarantor delivered to Lender, except as disclosed therein. 3.07 Litigation. Company Guarantor is not involved in, nor is Company Guarantor aware of the threat of, any litigation, nor are there any outstanding or unpaid judgments against Company Guarantor and there is no litigation that could, collectively or individually, create a material adverse change if determined, adversely against Company Guarantor. 3.08 Taxes. All tax returns required to be filed by the Company Guarantor with all governmental authorities have been filed, and all taxes, assessments, fees and other governmental charges upon Company Guarantor or upon any of Company Guarantor's property, income or franchises which are due and payable, have been paid (other than any the amount or validity of which are currently being contested in good faith by appropriate proceedings); and no tax lien has been filed and, to the knowledge of Company Guarantor, no claim is being asserted with respect to any such tax, fee or other charge. 3.09 Survival. All representations and warranties made by Company Guarantor herein shall survive the execution hereof. ARTICLE 4. SUBORDINATION OF CERTAIN INDEBTEDNESS 4.01 Subordination of All Company Guarantor Claims. As used herein, the term "Company Guarantor's Claims" shall mean all debts and liabilities of Borrower to Company Guarantor, whether such debts and liabilities now exist or are hereafter incurred or arise; or whether the obligations of Borrower thereon be direct, contingent, primary, secondary, several, joint and several, or otherwise, and irrespective of whether such debts or liabilities be evidenced by note, contract, open account, or otherwise, and irrespective of the person or persons in whose favor such debts or liabilities may, at their inception, have been, or may hereafter be created, or the manner in which they have been or may hereafter be acquired by Company Guarantor. The Company Guarantor's Claims shall include, without limitation, all rights and claims of Company Guarantor against Borrower (arising as a result of subrogation or otherwise) as a result of Company Guarantor's payment of all or a portion of the Guaranteed Debt. Upon the occurrence of an Event of Default (as defined in the Loan Agreement) or the occurrence of an event which would, with the giving of notice or the passage of time, or both, constitute an Event of Default, 8 Company Guarantor shall not receive or collect, directly or indirectly, from Borrower or any other party any amount upon the Company Guarantor's Claims. 4.02 Claims in Bankruptcy. In the event of, receivership, bankruptcy, reorganization, arrangement, debtor's relief, or other insolvency proceedings involving Company Guarantor as debtor, Lender shall have the right to prove its claim in any such proceeding so as to establish its rights hereunder and receive directly from the receiver, trustee or other court custodian dividends and payments which would otherwise be payable upon Company Guarantor's Claims. Company Guarantor hereby assigns such dividends and payments to Lender. Should Lender receive, for application upon the Guaranteed Debt, any such dividend or payment which is otherwise payable to Company Guarantor, and which, as between Borrower and Company Guarantor, shall constitute a credit upon the Company Guarantor's Claims, then upon payment to Lender in full of the Guaranteed Debt, Company Guarantor shall become subrogated to the rights of Lender to the extent that such payments to Lender on the Company Guarantor's Claims have contributed toward the liquidation of the Guaranteed Debt, and such subrogation shall be with respect to the proportion of the Guaranteed Debt which would have been unpaid if Lender had not received dividends or payments upon the Company Guarantor's Claims. 4.03 Payments Held in Trust. If, notwithstanding anything to the contrary in this Guaranty, Company Guarantor should receive any funds, payment, claim or distribution which is prohibited by this Guaranty, Company Guarantor agrees to hold in trust for Lender an amount equal to the amount of all funds, payments, claims or distributions so received, and agrees that it shall have absolutely no dominion over the amount of such funds, payments, claims or distributions so received except to pay them promptly to Lender, and Company Guarantor covenants promptly to pay the same to Lender. 4.04 Liens Subordinate. Company Guarantor agrees that any liens, security interests, judgment liens, charges or other encumbrances upon Borrower's assets securing payment of the Company Guarantor's Claims shall be and shall remain inferior and subordinate to any liens, security interests, judgment liens, charges or other encumbrances upon Borrower's assets securing payment of the Guaranteed Debt, regardless of whether such encumbrances in favor of Company Guarantor or Lender presently exist or are hereafter created or attach. Without the prior written consent of Lender, Company Guarantor shall not (i) exercise or enforce any creditor's right it may have against Borrower, or (ii) foreclose, repossess, sequester or otherwise take steps or institute any action or proceedings judicial or otherwise, including without limitation the commencement of, or joinder in, any liquidation, bankruptcy, rearrangement, debtor's relief or insolvency proceeding) to enforce any liens, mortgages, deeds of trust, security interests, collateral rights, judgments or other encumbrances on assets of Borrower held by Company Guarantor. ARTICLE 5. FINANCIAL COVENANTS 5.01 Financial Information. As soon as available and in any event within 45 days after the fling thereof with the Internal Revenue Service, Company Guarantor shall deliver to Lender a complete and correct copy of its federal income tax return. 9 5.02 Other Information. Company Guarantor shall furnish such other and additional information regarding the business activities and financial condition of Company Guarantor as Lender shall request from time to time. ARTICLE 6. MISCELLANEOUS 6.01 Waiver. No failure to exercise, and no delay in exercising, on the part of Lender, any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right. The rights of Lender hereunder shall be in addition to all other rights provided bylaw. No modification or waiver of any provision of this Guaranty, nor consent to departure therefrom, shall be effective unless in writing and no such consent or waiver shall extend beyond the particular case and purpose involved. No notice or demand given in any case shall constitute a waiver of the right to take other action in the same, similar or other instances without such notice or demand. 6.02 Notices. Any notices or other communications required or permitted to be given by this Guaranty must be given in writing and either (i) mailed by prepaid certified or registered mail, return receipt requested, addressed to the party at the address herein provided, (ii) by delivery to a third party commercial delivery service with evidence of delivery to the office of the addressee, or (iii) by personal delivery to the addressee. The addresses of the parties hereto are as follows: Company Guarantor: Lender Western National Bank 500 West Texas, Suite 100 Midland, Texas 79701 Attention: Scott A. Lovett Any such notice or other communication shall be deemed to have been given (whether actually received or not) on the day it is delivered to the U.S. Post Office or third party delivery service as aforesaid or if delivered by other means, then upon actual receipt by the addressee. Any party may change its address for purposes of this Guaranty by giving notice of such change to the other party pursuant to this Section. 6.03 Governing Law. THIS GUARANTY IS EXECUTED AND DELIVERED AS AN INCIDENT TO A LENDING TRANSACTION NEGOTIATED, CONSUMMATED, AND PERFORMABLE IN MIDLAND COUNTY, TEXAS, AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS. Any action or proceeding against Company Guarantor under or in connection with this Guaranty shall be brought in any state or federal court in Midland County, Texas. Company Guarantor 10 hereby irrevocably (i) submits to the nonexclusive jurisdiction of such courts, and (ii) waives any objection it may now or hereafter have as to the venue of any such action or proceeding brought in such court or that such court is an inconvenient forum. Company Guarantor agrees that service of process upon it may be made by certified or registered mail, return receipt requested, at its address specified herein. Nothing herein shall affect the right of Lender to serve process in any other matter permitted by law or shall limit the right of Lender to bring any action or proceeding against Company Guarantor or with respect to any of Company Guarantor's property in courts in other jurisdictions. Any action or proceeding by Company Guarantor against Lender shall be brought only in a court located in Midland County, Texas. 6.04 Invalid Provisions. If any provision of this Guaranty is held to be illegal, invalid, or unenforceable under present or future laws effective during the term of this Guaranty, such provision shall be fully severable and this Guaranty shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part of this Guaranty, and the remaining provisions of this Guaranty shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance from this Guaranty, unless such continued effectiveness of this Guaranty, as modified, would be contrary to the basic understandings and intentions of the parties as expressed herein. 6.05 Amendments. This Guaranty may be amended only by an instrument in writing executed by the party or an authorized representative of the party against whom such amendment is sought to be enforced. 6.06 Parties Bound; Assignment. This Guaranty shall be binding upon and inure to the benefit of the parties hereto and their respective successors, assigns and legal representatives; provided, however, that Company Guarantor may not, without the prior written consent of Lender, assign any of its rights, powers, duties or obligations hereunder. 6.07 Headings. Section headings are for convenience of reference only and shall in no way affect the interpretation of this Guaranty. 6.08 Recitals. The recital and introductory paragraphs hereof are a part hereof, form a basis for this Guaranty and shall be considered prima facie evidence of the facts and documents referred to therein. 6.09 Counterparts. To facilitate execution, this Guaranty may be executed in as many counterparts as may be convenient or required. It shall not be necessary that the signature or acknowledgment of, or on behalf of, each party, or that the signature of all persons required to bind any party, or the acknowledgment of such party, appear on each counterpart. All counterparts shall collectively constitute a single instrument. It shall not be necessary in making proof of this Guaranty to produce or account for more than a single counterpart containing the respective signatures of, or on behalf of, and the respective acknowledgments of, each of the parties hereto. Any signature or acknowledgment page to any counterpart may be detached from such counterpart without impairing the legal effect of the signatures or acknowledgments thereon and thereafter attached to another counterpart identical thereto except having attached to it additional signature or acknowledgment pages. 11 6.10 Rights and Remedies. If Company Guarantor becomes liable for any indebtedness owing by Borrower to Lender, by endorsement or otherwise, other than under this Guaranty, such liability shall not be in any manner impaired or affected hereby and the rights of Lender hereunder shall be cumulative of any and all other rights that Lender may ever have against Company Guarantor. The exercise by Lender of any right or remedy hereunder or under any other instrument, or at law or in equity, shall not preclude the concurrent or subsequent exercise of any other right or remedy. 6.11 ENTIRETY. THIS GUARANTY EMBODIES THE FINAL, ENTIRE AGREEMENT OF COMPANY GUARANTOR AND LENDER WITH RESPECT TO COMPANY GUARANTOR'S GUARANTY OF THE GUARANTEED DEBT AND SUPERSEDES ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS, AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT MATTER HEREOF. THIS GUARANTY IS INTENDED BY COMPANY GUARANTOR AND LENDER AS A FINAL AND COMPLETE EXPRESSION OF THE TERMS OF THE GUARANTY, AND NO COURSE OF DEALING BETWEEN COMPANY GUARANTOR AND LENDER, NO COURSE OF PERFORMANCE, NO TRADE PRACTICES, AND NO EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OR OTHER EXTRINSIC EVIDENCE OF ANY NATURE SHALL BE USED TO CONTRADICT, VARY, SUPPLEMENT OR MODIFY ANY TERM OF THIS GUARANTY AGREEMENT. THERE ARE NO ORAL AGREEMENTS BETWEEN COMPANY GUARANTOR AND LENDER. 6.12 APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. COURTS WITHIN THE STATE OF TEXAS SHALL HAVE JURISDICTION OVER ANY AND ALL DISPUTES BETWEEN COMPANY GUARANTOR AND LENDER, WHETHER IN LAW OR EQUITY, INCLUDING, BUT NOT LIMITED TO, ANY AND ALL DISPUTES ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT; AND VENUE IN ANY SUCH DISPUTE, WHETHER IN FEDERAL OR STATE COURT, SHALL BE LAID IN MIDLAND COUNTY, TEXAS. DATED to be effective from and as of the day and year first above written. ------------------------------------------ By: -------------------------------------- WESTERN NATIONAL BANK By: -------------------------------------- 12 STATE OF TEXAS ) ) COUNTY OF MIDLAND ) The foregoing instrument was acknowledged before me on this ____ day of _______________, 1999, by ______________________________ of WESTERN NATIONAL BANK, a national banking association, on behalf of said association. ----------------------------- Notary Public, State of Texas STATE OF TEXAS ) ) COUNTY OF MIDLAND ) The foregoing instrument was acknowledged before me this ____ day of September, 1999, by ___________________________, ________________________________ of __________________________, a Texas _____________________, for and on behalf of said ______________________________________. ----------------------------- Notary Public, State of Texas 13 LIMITED GUARANTY AGREEMENT This LIMITED GUARANTY AGREEMENT (this "Guaranty"), dated as of September ____, 1999, is made by ______________________ ("Guarantor"), for the benefit of WESTERN NATIONAL BANK, a national banking association ("Lender"). WITNESSETH: WHEREAS, Lender has entered into a Loan Agreement (as the same may hereafter be amended, restated or otherwise modified from time to time, the "Loan Agreement"), dated of even date herewith, with Natural Gas Services Group, Inc., a Texas corporation ("Borrower"), pursuant to which Borrower has executed that certain Term Promissory Note in the original principal amount of $1,500,000.00 and that certain Revolving Line of Credit Promissory Note in the original principal amount of $750,000.00 (together with all renewals, refinancings, modifications, increases and extensions thereof, the "Notes") under which Borrower has become indebted, and may from time to time be further indebted, to Lender with respect to loans (the "Loans") which are further evidenced, secured or governed by other instruments and security documents executed in connection with the Loans (collectively, the "Security Documents"); and WHEREAS, Lender is not willing to make the Loans, or otherwise extend credit, to Borrower unless Guarantor guarantees payment to Lender of the Guaranteed Debt (as herein defined) pursuant to the following terms; and WHEREAS, Guarantor will directly benefit from Lender's making the Loans to Borrower. NOW, THEREFORE, as a material inducement to Lender to enter into the Loan Agreement and to make the Loans to Borrower thereunder, and to extend such additional credit as Lender may from time to time agree to extend thereunder, and for other good and valuable consideration, the receipt and legal sufficiency of which are hereby acknowledged, the parties do hereby agree as follows: ARTICLE 1. NATURE AND SCOPE OF GUARANTY 1.1 Definition of Guaranteed Debt. As used herein, the term "Guaranteed Debt" means all of the following: (a) all principal, interest, attorneys' fees, liabilities for costs and expenses and other indebtedness, obligations and liabilities of Borrower to Lender at any time created or arising in connection with the Loans, or any amendment thereto or substitution therefore, including, but not limited to, all indebtedness, obligations and liabilities of Borrower to Lender arising under the Notes, or under any renewals, modifications, increases and extensions of the Notes, or under the Loan Agreement and the Security Documents; (b) all liabilities of Borrower for future advances, extensions of credit or other value at any time given or made by Lender to Borrower arising under the Loan Agreement and the Security Documents; (c) any and all other indebtedness, liabilities, obligations and duties of every kind and character of Borrower to Lender arising under the Loan Agreement and the Security Documents, whether now or hereafter existing or arising, regardless of whether such present or future indebtedness, liabilities, obligations or duties be direct or indirect, related or unrelated, liquidated or unliquidated, primary or secondary, joint, several, or joint and several, or fixed or contingent; (d) any and all post-petition interest and expenses (including attorneys' fees) whether or not allowed under any bankruptcy, insolvency, or other similar law; and (e) all costs, expenses and fees, including, but not limited to, court costs and attorneys' fees arising in connection with the collection of any or all amounts, indebtedness, obligations and liabilities of Borrower to Lender described in items (a) through (d) of this Section 1.1. 1.2 Guaranty of Obligation. Subject to Section 1.12 below, Guarantor hereby irrevocably and unconditionally guarantees to Lender and its successors and assigns the payment and performance of the Guaranteed Debt as and when the same shall be due and payable, whether by lapse of time, by acceleration of maturity or otherwise. Guarantor hereby irrevocably and unconditionally covenants and agrees that Guarantor is liable for the Guaranteed Debt as a primary obligor. 1.3 Nature of Guaranty. This Guaranty is an irrevocable, absolute, continuing guaranty of payment and performance and not a guaranty of collection. This Guaranty may not be revoked by Guarantor and shall continue to be effective with respect to any Guaranteed Debt arising or created after any attempted revocation by Guarantor and after (if Guarantor is a natural person) such Guarantor's death (in which event this Guaranty shall be binding upon such Guarantor's estate and Guarantor's legal representative and heirs). This Guaranty may be enforced by Lender and any subsequent holder of the Guaranteed Debt and shall not be discharged by the assignment or negotiation of all or part of the Guaranteed Debt. 1.4 Guaranteed Debt Not Reduced by Offset. The Guaranteed Debt and the liabilities and obligations of Guarantor to Lender hereunder, shall not be reduced, discharged or released because or by reason of any existing or future offset, claim or defense of Borrower, or any other party, against Lender or against payment of the Guaranteed Debt, whether such offset, claim or defense arises in connection with the Guaranteed Debt (or the transactions creating the Guaranteed Debt) or otherwise. Without limiting the foregoing or Guarantor's liability hereunder, to the extent that Lender advances funds pursuant to the Notes and does not receive payments or benefits thereon in the amounts and at the times required or provided in the Notes, Guarantor is absolutely liable to make such payments to (and confer such benefits on) Lender, on a timely basis. 2 1.5 Payment bar Guarantor. If all or any part of the Guaranteed Debt shall not be punctually paid when due, whether at maturity or earlier by acceleration or otherwise, Guarantor shall, immediately upon demand by Lender, and without presentment, protest, notice of protest, notice of non-payment, notice of intention to accelerate the maturity, notice of acceleration of the maturity, or any other notice whatsoever, pay in lawful money of the United States of America, the amount due on the Guaranteed Debt to Lender at Lender's address as set forth herein. Such demand(s) may be made at any time coincident with or after the time for payment of all or part of the Guaranteed Debt, and may be made from time to time with respect to the same or different items of Guaranteed Debt. Such demand shall be deemed made, given and received in accordance with the notice provisions hereof. 1.6 No Duty to Pursue Others. It shall not be necessary for Lender (and Guarantor hereby waives any rights which such Guarantor may have to require Lender), in order to enforce such payment by Guarantor, first to (i) institute suit or exhaust its remedies against Borrower or others liable on the Guaranteed Debt or any other person, (ii) enforce Lender's rights against any collateral which shall ever have been given to secure the Guaranteed Debt, (iii) join Borrower or any others liable on the Guaranteed Debt in any action seeking to enforce this Guaranty, (iv) exhaust any remedies available to Lender against any collateral which shall ever have been given to secure the Guaranteed Debt, or (v) resort to any other means of obtaining payment of the Guaranteed Debt. Lender shall not be required to mitigate damages or take any other action to reduce, collect or enforce the Guaranteed Debt. 1.7 Waivers. Guarantor agrees to the provisions of the Loan Agreement and the Security Documents, and hereby waives (a) all rights of Guarantor under Rule 31, Texas Rules of Civil Procedure, or Chapter 34 of the Texas Business and Commerce Code, or Section 17.001 of the Texas Civil Practice and Remedies Code; (b) to the extent Guarantor is subject to the Texas Revised Partnership Act ("TRPA"), compliance by Lender with Section 3.05(d) of TRPA and (c) notice of (i) any loans or advances made by Lender to Borrower, (ii) acceptance of this Guaranty, (iii) any amendment or extension of the Notes, the Loan Agreement or of any other Security Documents, (iv) the execution and delivery by Borrower and Lender of any other loan or credit agreement or of Borrower's execution and delivery of any promissory notes or other documents arising under the Loan Agreement, the Security Documents or in connection with the Collateral (as defined in the Loan Agreement or Security Documents), (v) the occurrence of any breach by Borrower or Event of Default (as defined in the Loan Agreement), (vi) Lender's transfer or disposition of the Guaranteed Debt, or any part thereof, (vii) sale or foreclosure (or posting or advertising for sale or foreclosure) of any collateral for the Guaranteed Debt, (viii) protest, proof of non-payment or default by Borrower, or (ix) any other action at any time taken or omitted by Lender, and, generally, all demands and notices of every kind in connection with this Guaranty, the Loan Agreement, the Security Documents, or any other documents or agreements evidencing, securing or relating to any of the Guaranteed Debt and the obligations hereby guaranteed. The parties intend that Guarantor shall not be considered a "debtor" as defined in Tex. Bus. & Com. Code Ann. Section 9.105 (and any successor statute thereto). 3 1.8 Payment of Expenses. If Guarantor breaches or fails to timely perform any provisions of this Guaranty, Guarantor shall, immediately upon demand by Lender, pay Lender all costs and expenses (including court costs and reasonable attorneys' fees) incurred by Lender in the enforcement hereof or the preservation of Lender's rights hereunder. The covenant contained in this Section 1.8 shall survive the payment of the Guaranteed Debt. 1.9 Effect of Bankruptcy. If, pursuant to any insolvency, bankruptcy, reorganization, receivership or other debtor relief law, or any judgment, order or decision thereunder, Lender must rescind or restore any payment, or any part thereof, received by Lender in satisfaction of the Guaranteed Debt, as set forth herein, any prior release or discharge from the terms of this Guaranty given to Guarantor by Lender shall be without effect, and this Guaranty shall remain in full force and effect. It is the intention of Borrower and Guarantor that Guarantor's obligations hereunder shall not be discharged except by Guarantor's performance of such obligations and then only to the extent of such performance. 1.10 Waiver of Subrogation, Reimbursement and Contribution. Notwithstanding anything to the contrary contained in this Guaranty, from and after the date hereof until payment to Lender in full of the Guaranteed Debt, Guarantor shall not, and shall not attempt to, enforce, collect or exercise any rights Guarantor may now or hereafter have under any agreement, at law or in equity (including, without limitation, any law subrogating the Guarantor to the rights of Lender) to assert any claim against or seek contribution, indemnification or any other form of reimbursement from Borrower or any other party liable for payment of any or all of the Guaranteed Debt for any payment made by Guarantor under or in connection with this Guaranty or otherwise. After payment to Lender in full of the Guaranteed Debt, Lender shall not contest the subrogation of Guarantor to the rights of Lender under the Security Documents, it being expressly agreed that Guarantor's rights under such subrogation shall be and remain subordinate and inferior to the rights of Lender under the Security Documents until and unless all amounts due Lender by Borrower under the Security Documents shall be paid in full. 1.11 Borrower. The term "Borrower" as used herein shall include any new or successor corporation, association, partnership (general or limited), joint venture, trust or other individual or organization formed as a result of any merger, consolidation, reorganization, amalgamation, sale, transfer or gift of Borrower or any interest in Borrower. 1.12 Limitation of Liability. Notwithstanding anything in this Guaranty to the contrary, Guarantor's liability for payment to Lender of the Guaranteed Debt is expressly limited to ____% of the Guaranteed Debt. ARTICLE 2. EVENTS AND CIRCUMSTANCES NOT REDUCING OR DISCHARGING GUARANTOR'S OBLIGATIONS Guarantor hereby consents and agrees to each of the following, and agrees that Guarantor's obligations under this Guaranty shall not be released, diminished, impaired, reduced or adversely affected by any of the following, and waives any common law, equitable, statutory or other rights (including, without limitation, rights to notice) which Guarantor might otherwise have as a result of or in connection with any of the following: 4 2.1 Modifications. Any renewal, refinancing, extension, increase, modification, alteration or rearrangement of all or any part of the Guaranteed Debt, the Notes, the Loan Agreement, the Security Documents, or any other document, instrument, contract or understanding between Borrower and Lender, or any other parties, pertaining to the Guaranteed Debt or any failure of Lender to notify Guarantor of any such action. 2.2 Adjustment. Any adjustment, indulgence, forbearance or compromise that might be granted or given by Lender to Borrower or Guarantor. 2.3 Condition of Borrower or Guarantor. The insolvency, bankruptcy, arrangement, adjustment, composition, liquidation, disability, death, dissolution or lack of power of Borrower, Guarantor or any other party at any time liable for the payment of all or part of the Guaranteed Debt; or any changes in the shareholders, partners or members of Borrower or Guarantor; or any reorganization of Borrower or Guarantor. 2.4 Invalidity of Guaranteed Debt. The invalidity, illegality or unenforceability of all or any part of the Guaranteed Debt, or any document or agreement executed in connection with the Guaranteed Debt, for any reason whatsoever, including, without limitation, the fact that (i) the Guaranteed Debt, or any part thereof, exceeds the amount permitted by law, (ii) the act of creating the Guaranteed Debt or any part thereof is ultra vires, (iii) the officers or representatives executing the Notes, the Loan Agreement or the other Security Documents or otherwise creating the Guaranteed Debt acted in excess of their authority, (iv) the Guaranteed Debt violates applicable usury laws, (v) the Borrower has valid defenses, claims or offsets (whether at law, in equity or by agreement) which render the Guaranteed Debt wholly or partially uncollectible from Borrower, (vi) the creation, performance or repayment of the Guaranteed Debt (or the execution, delivery and performance of any document or instrument representing part of the Guaranteed Debt or executed in connection with the Guaranteed Debt, or given to secure the repayment of the Guaranteed Debt) is illegal, uncollectible or unenforceable, or (vii) the Notes, the Loan Agreement or any of the other Security Documents have been forged or otherwise are irregular or not genuine or authentic, it being agreed that Guarantor shall remain liable hereon regardless of whether Borrower or any other person be found not liable on the Guaranteed Debt or any part thereof for any reason. 2.5 Release of Obligors. Any full or partial release of the liability of Borrower on the Guaranteed Debt, or any part thereof, or any other person or entity now or hereafter liable, whether directly or indirectly, jointly, severally, or jointly and severally, to pay, perform, guarantee or assure the payment of the Guaranteed Debt, or any part thereof, it being recognized, acknowledged and agreed by Guarantor that Guarantor may be required to pay the Guaranteed Debt without assistance or support of any other party, and Guarantor has not been induced to enter into this Guaranty on the basis of a contemplation, belief, understanding or agreement that other parties will be liable to pay or perform the Guaranteed Debt, or that Lender will look to other parties to pay or perform the Guaranteed Debt. 2.6 Other Collateral. The taking or accepting of any other security, collateral or guaranty, or other assurance of payment, for all or any part of the Guaranteed Debt. 5 2.7 Release of Collateral. Any release, surrender, exchange, subordination, deterioration, waste, loss or impairment (including, without limitation, negligent, willful, unreasonable or unjustifiable impairment) of any collateral, property or security, at any time existing in connection with, or assuring or securing payment of, all or any part of the Guaranteed Debt. 2.8 Care and Diligence. The failure of Lender or any other party to exercise diligence or reasonable care in the preservation, protection, enforcement, sale or other handling or treatment of all or any part of such collateral, property or security, including, but not limited to, any neglect, delay, omission, failure or refusal of Lender (i) to take or prosecute any action for the collection of any of the Guaranteed Debt or (ii) to foreclose, or initiate any action to foreclose, or, once commenced, prosecute to completion any action to foreclose upon any security therefor, or (iii) to take or prosecute any action in connection with any instrument or agreement evidencing or securing all or any part of the Guaranteed Debt. 2.9 Unenforceability. The fact that any collateral, security, security interest or lien contemplated or intended to be dive n, created or granted as security for the repayment of the Guaranteed Debt, or any part thereof, shall not be properly perfected or created, or shall prove to be unenforceable or subordinate to any other security interest or lien, it being recognized and agreed by Guarantor that it is not entering into this Guaranty in reliance on, or in contemplation of the benefits of, the validity, enforceability, collectibility or value of any of the collateral for the Guaranteed Debt. 2.10 Offset. The Notes, the Guaranteed Debt and the liabilities and obligations of Guarantor to Lender hereunder shall not be reduced, discharged or released because of or by reason of any existing or future right of offset, claim or defense of Borrower against Lender, or any other party, or against payment of the Guaranteed Debt, whether such right of offset, claim or defense of Borrower against Lender, or any other party, or against payment of the Guaranteed Debt, whether such right of offset, claim or defense arises in connection with the Guaranteed Debt (or the transactions creating the Guaranteed Debt) or otherwise. 2.11 Merger. The reorganization, conversion, merger, amalgamation or consolidation of Borrower into or with any other corporation or entity. 2.12 Preference. Any payment by Borrower to Lender is held to constitute a preference under bankruptcy laws, or for any reason Lender is required to refund such payment or pay such amount to Borrower or someone else. 2.13 Other Actions Taken or Omitted. Any other action taken or omitted to be taken with respect to the Loan Agreement, the Security Documents, the Guaranteed Debt, or the security and collateral therefor, whether or not such action or omission prejudices Guarantor or increases the likelihood that Guarantor will be required to pay the Guaranteed Debt pursuant to the terms hereof, it being the unambiguous and unequivocal intention of Guarantor that it shall be obligated to pay the Guaranteed Debt when due, notwithstanding any occurrence, circumstance, event, action, or omission whatsoever, whether contemplated or uncontemplated, and whether or not otherwise or particularly described herein, which obligation shall be deemed satisfied only upon the full And final payment and satisfaction of the Guaranteed Debt. 6 ARTICLE 3. REPRESENTATIONS AND WARRANTIES As material inducements to Lender to enter into the Loan Agreement and the Security Documents and extend credit to Borrower, Guarantor represents and warrants to Lender as follows: 3.1 Benefit. Guarantor is the owner of a direct or indirect interest in Borrower, or has received, or will receive, direct or indirect benefit from the making of this Guaranty with respect to the Guaranteed Debt. 3.2 Familiarity and Reliance. Guarantor is familiar with, and has independently reviewed books and records regarding, the financial. condition of the Borrower and is familiar with the value of any and all collateral intended to be created as security for the payment of the Notes or Guaranteed Debt; provided, however, Guarantor is not relying on such financial condition or the collateral as an inducement to enter into this Guaranty. 3.3 No Representation by Lender. Neither Lender nor any other party has made any representation, warranty or statement to Guarantor in order to induce the Guarantor to execute this Guaranty. 3.4 Guarantor's Financial Condition. As of the date hereof, and after giving effect to this Guaranty and the contingent obligation evidenced hereby, Guarantor is, and will be, solvent, and has and will have assets which, fairly valued, exceed Guarantor's obligations, liabilities (including contingent liabilities) and debts, and has and will have property and assets sufficient to satisfy and repay Guarantor's obligations and liabilities. 3.5 Legality. All action on Guarantor's part requisite for the due execution, delivery and performance of this Guaranty and the other Security Documents to which Guarantor is a party has been duly and effectively taken. The execution, delivery and performance by Guarantor of this Guaranty and the consummation of the transactions contemplated hereunder do not, and will not, contravene or conflict with any law, statute or regulation whatsoever to which Guarantor is subject or constitute a default (or an event which with notice or lapse of time or both would constitute a default) under, or result in the breach of, any indenture, mortgage, deed of trust, charge, lien, or any contract, agreement or other instrument to which Guarantor is a party or which may be applicable to Guarantor. This Guaranty is a legal and binding obligation of Guarantor and is enforceable in accordance with its terms, except as limited by bankruptcy, insolvency or other laws of general application relating to the enforcement of creditors' rights. 3.6 Financial Statements. Each financial statement of Guarantor delivered heretofore, concurrently herewith or hereafter to Lender completely and accurately discloses the financial condition of Guarantor (including all contingent liabilities) as of the date thereof and for the period covered thereby, and there has been no material adverse change in Guarantor's financial condition subsequent to the date of the most recent financial statement of Guarantor delivered to Lender, except as disclosed therein. 7 3.7 Litigation. Guarantor is not involved in, nor is Guarantor aware of the threat of, any litigation, nor are there any outstanding or unpaid judgments against Guarantor and there is no litigation that could, collectively or individually, create a material adverse change if determined adversely against Guarantor. 3.8 Taxes. All tax returns required to be filed by the Guarantor with all governmental authorities have been filed, and all taxes, assessments, fees and other governmental charges upon Guarantor or upon any of Guarantor's property, income or franchises which are due and payable, have been paid (other than any the amount or validity of which are currently being contested in good faith by appropriate proceedings); and no tax lien has been filed and, to the knowledge of Guarantor, no claim is being asserted with respect to any such tax, fee or other charge. 3.9 Survival. All representations and warranties made by Guarantor herein shall survive the execution hereof. ARTICLE 4. SUBORDINATION OF CERTAIN INDEBTEDNESS 4.1 Subordination of All Guarantor Claims. As used herein, the term "Guarantor's Claims" shall mean all debts and liabilities of Borrower to Guarantor, whether such debts and liabilities now exist or are hereafter incurred or arise; or whether the obligations of Borrower thereon be direct, contingent, primary, secondary, several, joint and several, or otherwise, and irrespective of whether such debts or liabilities be evidenced by note, contract, open account, or otherwise, and irrespective of the person or persons in whose favor such debts or liabilities may, at their inception, have been, or may hereafter be created, or the manner in which they have been or may hereafter be acquired by Guarantor. The Guarantor's Claims shall include, without limitation, all rights and claims of Guarantor against Borrower (arising as a result of subrogation or otherwise) as a result of Guarantor's payment of all or a portion of the Guaranteed Debt. Upon the occurrence of an Event of Default (as defined in the Loan Agreement) or the occurrence of an event which would, with the giving of notice or the passage of time, or both, constitute an Event of Default, Guarantor shall not receive or collect, directly or indirectly, from Borrower or any other party any amount upon the Guarantor's Claims. 4.2 Claims in Bankruptcy. In the event of receivership, bankruptcy, reorganization, arrangement, debtor's relief, or other insolvency proceedings involving Guarantor as debtor, Lender shall have the right to prove its claim in any such proceeding so as to establish its rights hereunder and receive directly from the receiver, trustee or other court custodian dividends and payments which would otherwise be payable upon Guarantor's Claims. Guarantor hereby assigns such dividends and payments to Lender. Should Lender receive, for application upon the Guaranteed Debt, any such dividend or payment which is otherwise payable to Guarantor, and which, as between Borrower and Guarantor, shall constitute a credit upon the Guarantor's Claims, then upon payment to Lender in full of the Guaranteed Debt, Guarantor shall become subrogated to the rights of Lender to the extent that such payments to Lender on the Guarantor's Claims have contributed toward the liquidation of the Guaranteed Debt, and such subrogation shall be with respect to the proportion of the Guaranteed Debt which would have been unpaid if Lender had not received dividends or payments upon the Guarantor's Claims. 8 4.3 Payments Held in Trust. If, notwithstanding anything to the contrary in this Guaranty, Guarantor should receive any funds, payment, claim or distribution which is prohibited by this Guaranty, Guarantor agrees to hold in trust for Lender an amount equal to the amount of all funds, payments, claims or distributions so received, and agrees that it shall have absolutely no dominion over the amount of such funds, payments, claims or distributions so received except to pay them promptly to Lender, and Guarantor covenants promptly to pay the same to Lender. 4.4 Liens Subordinate. Guarantor agrees that any liens, security interests, judgment hens, charges or other encumbrances upon Borrower's assets securing payment of the Guarantor's Claims shall be and shall remain inferior and subordinate to any liens, security interests, judgment liens, charges or other encumbrances upon Borrower's assets securing payment of the Guaranteed Debt, regardless of whether such encumbrances in favor of Guarantor or Lender presently exist or are hereafter created or attach. Without the prior written consent of Lender, Guarantor shall not (i) exercise or enforce any creditor's right it may have against Borrower, or (ii) foreclose, repossess, sequester or otherwise take steps or institute any action or proceedings (judicial or otherwise, including without limitation the commencement of, or joinder in, any liquidation, bankruptcy, rearrangement, debtor's relief or insolvency proceeding) to enforce any liens, mortgages, deeds of trust, security interests, collateral rights, judgments or other encumbrances on assets of Borrower held by Guarantor. ARTICLE 5. AFFIRMATIVE COVENANTS 5.1 Financial Information. As soon as available and in any event within 90 days after the end of each fiscal year of Guarantor, Guarantor shall deliver or cause to be delivered Guarantor's (i) unaudited balance sheet, and (ii) related unaudited statement of profit and loss of Guarantor for such year, in each case with all supporting schedules. As soon as available and in any event within 45 days after the filing thereof with the Internal Revenue Service, Guarantor shall deliver to Lender a complete and correct copy of Guarantor's federal income tax return. 5.2 Other Information. Guarantor shall furnish such other and additional information regarding the business activities and financial condition of Guarantor as Lender shall request from time to time. ARTICLE 6. MISCELLANEOUS 6.1 Waiver. No failure to exercise, and no delay in exercising, on the part of Lender, any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right. The rights of Lender hereunder shall be in addition to all other rights provided bylaw. No modification or waiver of any provision of this Guaranty, nor consent to departure therefrom, shall be effective unless in writing and no such consent or waiver shall extend beyond the particular case and purpose involved. No notice or demand given in any case shall constitute a waiver of the right to take other action in the same, similar or other instances without such notice or demand. 9 6.2 Notices. Any notices or other communications required or permitted to be given by this Guaranty must be given in wring and either (i) mailed by prepaid certified or registered mail, return receipt requested, addressed to the party at the address herein provided, (ii) by delivery to a third party commercial delivery service with evidence of delivery to the office of the addressee, or (iii) by personal delivery to the addressee. The addresses of the parties hereto are as follows: Guarantor: Lender: Western National Bank 500 West Texas, Suite 100 Midland, Texas 79701 Attention: Scott A. Lovett Any such notice or other communication shall be deemed to have been given (whether actually received or not) on the day it is delivered to the U.S. Post Office or third party delivery service as aforesaid or if delivered by other means, then upon actual receipt by the addressee. Any party may change its address for purposes of this Guaranty by giving notice of such change to the other party pursuant to this Section. 6.3 Governing Law. THIS GUARANTY IS EXECUTED AND DELIVERED AS AN INCIDENT TO A LENDING TRANSACTION NEGOTIATED, CONSUMMATED, AND PERFORMABLE IN MIDLAND COUNTY, TEXAS, AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS. Any action or proceeding against Guarantor under or in connection with this Guaranty shall be brought in any state or federal court in Midland County, Texas. Guarantor hereby irrevocably (i) submits to the nonexclusive jurisdiction of such courts, and (ii) waives any objection it may now or hereafter have as to the venue of any such action or proceeding brought in such court or that such court is an inconvenient forum. Guarantor agrees that service of process upon it may be made by certified or registered mail, return receipt requested, at its address specified herein. Nothing herein shall affect the right of Lender to serve process in any other matter permitted by law or shall limit the right of Lender to bring any action or proceeding against Guarantor or with respect to any of Guarantor's property in courts in other jurisdictions. Any action or proceeding by Guarantor against Lender shall be brought only in a court located in Midland County, Texas. 6.4 Invalid Provisions. If any provision of this Guaranty is held to be illegal, invalid, or unenforceable under present or future laws effective during the term of this Guaranty, such provision shall be fully severable and this Guaranty shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part of this Guaranty, and the remaining provisions of this Guaranty shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance from this Guaranty, unless such continued effectiveness of this Guaranty, as modified, would be contrary to the basic understandings and intentions of the parties as expressed herein. 10 6.5 Amendments. This Guaranty may be amended only by an instrument in writing executed by the party or an authorized representative of the party against whom such amendment is sought to be enforced. 6.6 Parties Bound; Assignment. This Guaranty shall be binding upon and inure to the benefit of the parties hereto and their respective successors, assigns and legal representatives; provided, however, that Guarantor may not, without the prior written consent of Lender, assign any of its rights, powers, duties or obligations hereunder. 6.7 Headings. Section headings are for convenience of reference only and shall in no way affect the interpretation of this Guaranty. 6.8 Recitals. The recital and introductory paragraphs hereof are a part hereof, form a basis for this Guaranty and shall be considered prima facie evidence of the facts and documents referred to therein. 6.9 Counterparts. To facilitate execution, this Guaranty may be executed in as many counterparts as may be convenient or required. It shall not be necessary that the signature or acknowledgment of, or on behalf of, each party, or that the signature of all persons required to bind any party, or the acknowledgment of such party, appear on each counterpart. All counterparts shall collectively constitute a single instrument. It shall not be necessary in making proof of this Guaranty to produce or account for more than a single counterpart containing the respective signatures of, or on behalf of, and the respective acknowledgments of, each of the parties hereto. Any signature or acknowledgment page to any counterpart may be detached from such counterpart without impairing the legal effect of the signatures or acknowledgments thereon and thereafter attached to another counterpart identical thereto except having attached to it additional signature or acknowledgment pages. 6.10 Rights and Remedies. If Guarantor becomes liable for any indebtedness owing by Borrower to Lender, by endorsement or otherwise, other than under this Guaranty, such liability shall not be in any manner impaired or affected hereby and the rights of Lender hereunder shall be cumulative of any and all other rights that Lender may ever have against Guarantor. The exercise by Lender of any right or remedy hereunder or under any other instrument, or at law or in equity, shall not preclude the concurrent or subsequent exercise of any other right or remedy. 6.11 ENTIRETY. THIS GUARANTY EMBODIES THE FINAL, ENTIRE AGREEMENT OF GUARANTOR AND LENDER WITH RESPECT TO GUARANTOR'S GUARANTY OF THE GUARANTEED DEBT AND SUPERSEDES ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS, AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT MATTER HEREOF. THIS GUARANTY IS INTENDED BY GUARANTOR AND LENDER AS A FINAL AND COMPLETE EXPRESSION OF THE TERMS OF THE GUARANTY, AND NO COURSE OF DEALING BETWEEN GUARANTOR AND LENDER, NO COURSE OF PERFORMANCE, NO TRADE PRACTICES, AND NO EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OR OTHER EXTRINSIC EVIDENCE OF ANY NATURE SHALL BE USED TO CONTRADICT, VARY, 11 SUPPLEMENT OR MODIFY ANY TERM OF THIS GUARANTY AGREEMENT. THERE ARE NO ORAL AGREEMENTS BETWEEN GUARANTOR AND LENDER. 6.12 APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. COURTS WITHIN THE STATE OF TEXAS SHALL HAVE JURISDICTION OVER ANY AND ALL DISPUTES BETWEEN BORROWER AND LENDER, WHETHER IN LAW OR EQUITY, INCLUDING, BUT NOT LIMITED TO, ANY AND ALL DISPUTES ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT; AND VENUE IN ANY SUCH DISPUTE, WHETHER IN FEDERAL OR STATE COURT, SHALL BE LAID IN MIDLAND COUNTY, TEXAS. DATED to be effective from and as of the day and year first above written. -------------------------- 12 THE STATE OF TEXAS ) ) COUNTY OF MIDLAND ) This instrument was acknowledged before me on ________________________ by ________________________. --------------------------------- Notary Public, State of Texas WESTERN NATIONAL BANK By: ------------------------------ THE STATE OF TEXAS ) ) COUNTY OF MIDLAND ) The foregoing instrument was acknowledged before me on this ____day of ______________________, 1999, by _________________________________ of WESTERN NATIONAL BANK, a national banking association, on behalf of said association. ------------------------------- Notary Public, State of Texas 13 EX-10.17 13 d96705a1exv10w17.txt COMMITMENT LETTER DATED JUNE 24, 2002 EXHIBIT 10.17 June 24, 2002 Natural Gas Services Group, Inc. 2911 S. County Road 1260 Midland, Texas 79706 Gentlemen: In accordance with recent discussions, Western National Bank ("WNB") is pleased to make the following commitment to Natural Gas Services Group, Inc., including, but not limited to, the terms and conditions set forth below. BORROWER: Natural Gas Services Group, Inc. ("NGSG") AMOUNT: $3,500,000 PURPOSE: Refinance remaining balance on indebtedness to Dominion after initial public offering and partial paydown. TERM: Five Years RATE: Wall Street Journal Prime + 1.0%, floating daily. REPAYMENT: Monthly payments of $58,333 + accrued interest. COLLATERAL: Superior security interest in all A/R, Inventory, and Equipment of borrowing entity and subsidiaries. Cross-collateralized with the with WNB notes # 816559, # 816307, # 817093, and # 817092. $1,000,000 life insurance policy on Wayne Vinson. GUARANTORS: Unlimited guaranties of: NGE Leasing; Rotary Gas; Hi-Tech Compressor; Flare King; and Great Lakes Compression. REPRESENTATIONS & WARRANTIES: Usual and customary representations and warranties for transactions of this nature, including but not limited to the following: (1) No material adverse change in financial condition of Borrower (2) Absence of litigation or any existing or pending adverse decree orders from a court or environmental agency. (3) No change in the nature of NGSG's primary business practices. CONDITIONS PRECEDENT: (1) Negotiation and execution of loan documents satisfactory to WNB and Borrower. (2) Completion of Initial Public Offering with NGSG netting at least $8,000,000 in proceeds. (3) NGSG shall be in compliance with existing loan agreement at time of funding. (4) Proceeds from the Initial Public Offering used to reduce Dominion debt to $3,500,000 COVENANTS: This facility is governed by a comprehensive loan agreement containing all of the standard representations, warranties, and events of default including, but not limited to, the following provisions: (1) NGSG shall provide monthly financial statements (consolidated with all subsidiaries), accounts receivable aging, borrowing base certificate ($750M RLOC), and compliance certificates within 45 days of each month end. (2) NGSG shall provide a quarterly report listing the physical location of all lease units including any remaining lease terms. (3) NGSG shall provide annual audited financial statements of borrower and all subsidiaries (combined) within 90 days of fiscal year end. (4) NGSG shall incur no additional debts, liens, or encumbrances in excess of $100M without prior, written WNB approval. (5) NGSG shall make no asset sales in excess of $100,000 without prior written WNB approval. (6) NGSG shall make no distributions / dividends (except for stated dividends on existing preferred stock) without prior, written WNB approval. (7) NGSG shall make no changes in management at the CEO / President level without prior, written WNB approval. (8) Use of loan proceeds limited to pay off of $3,500,000 Dominion Debt. (9) NGSG will allow WNB, at borrowers expense, to perform limited visual inspections on a portion of the leased compressors at least semi annually, not to exceed one inspection per quarter. (10) NGSG shall maintain a three month moving average traditional cash flow coverage of not less than 1.25x beginning 9/30/02. Calculated per existing loan agreement. (11) NGSG shall maintain a minimum current ratio of 1.5x measured monthly beginning 9/30/02. (12) NGSG shall not exceed a maximum debt less subordinated debt / tangible worth + subordinated debt as equity ratio of 1.0x beginning 9/30/02. (13) NGSG shall maintain a minimum tangible net worth of $11.5MM beginning 9/30/02. CLOSING COSTS: Borrower will pay all necessary fees and expenses incurred by WNB with respect to preparation of loan documents and filing fees. Thank you for the opportunity to continue to serve your banking needs. If you are in agreement with the terms and conditions outlined above, please sign this commitment and return it to me at your earliest convenience. If you should have any questions, comments, or simply wish to further our discussions pertaining to your request, please do not hesitate to contact me at 570-4181. Sincerely, /s/ Scott Lovett Scott Lovett Executive Vice President Western National Bank AGREED TO AND ACCEPTED THIS 25TH DAY OF JUNE, 2002. BORROWER: NATURAL GAS SERVICES GROUP, INC. BY: WAYNE VINSON, PRESIDENT /s/ Wayne Vinson Wayne Vinson President / Natural Gas Services Group, Inc. EX-10.18 14 d96705a1exv10w18.txt ARTICLES OF ORGANIZATION EXHIBIT 10.18 [THE STATE OF TEXAS SEAL] THE STATE OF TEXAS SECRETARY OF STATE IT IS HEREBY CERTIFIED that the attached is a true and correct copy of the following described document on file in this office: HY BON ROTARY COMPRESSION, L.L.C. FILE NO. 7067346-22 ARTICLES OF ORGANIZATION APRIL 20, 2000 [THE STATE OF TEXAS SEAL] IN TESTIMONY WHEREOF, I have hereunto signed my name officially and caused to be impressed hereon the Seal of State at my office in Austin, Texas on July 16, 2001. /s/ HENRY CUELLAR ----------------- Henry Cuellar Secretary of State DAB ARTICLES OF ORGANIZATION OF HY-BON ROTARY COMPRESSION, L.L.C. James P. Boldrick adopts the following Articles of Organization for a limited liability company under the Texas Limited Liability Company Act. ARTICLE I The name of the limited liability company, referred to in these Articles as the "Company", is Hy-Bon Rotary Compression, L.L.C. ARTICLE II The period of duration of the Company is perpetual. ARTICLE III The purpose for which the Company is organized is to transact any and all lawful business for which limited liability companies may be organized under the Texas Limited Liability Company Act. ARTICLE IV The address of the company's initial registered office is 2404 Commerce Drive, Midland, Texas 79703. The company's initial registered agent at that address is James J. Woodcock. ARTICLE V The Company will have five (5) managers. The names and addresses of the initial managers are: 1. James J. Woodcock, President P.O. Box 4185, Midland, TX 79704 2. Wayne Vincent, Vice President 2911 S. County Rd. 1260, Midland, TX 79706 3. James P. Boldrick 1801 West Wall, Midland, Texas 79701 4. James D. Ross, Treasurer P.O. Box 4185, Midland, Texas 79704 5. Wallace Sparkman P.O. Box 2483, Corpus Christi, TX 78403.
ARTICLE VI The Company's organizer is James P. Boldrick, whose address is 1801 West Wall, Midland, Texas 79701. These Articles of Organization are executed on behalf of the Company on this 17th day of April, 2000. /s/ JAMES P. BOLDRICK ---------------------------------- JAMES P. BOLDRICK, ORGANIZER SWORN TO on this 17th day of April, 2000, by the above named organizer. /s/ [ILLEGIBLE] ---------------------------------- Notary Public, State of Texas 2 HY-BON ROTARY COMPRESSION, LLC UNANIMOUS CONSENT RESOLUTION OF MEMBERS The undersigned, being all of the members of Hy-Bozo Rotary Compression, LLC hereby waive notice of meeting and consent to the following resolution: RESOLVED that the attached "REGULATIONS OF HY-BON ROTARY COMPRESSION, LLC" are approved and effective as of May 1, 2000; that signatures may be transmitted by facsimile transmission, and the above described document may be signed in counterpart by the undersigned. NGE Leasing, Inc. By: /s/ Scott Sparkman ----------------------------- President -------------------------------- (title) Hy-Bon Engineering Company, Inc. By: /s/ James D. Ross ----------------------------- CFO -------------------------------- (title) 3 EX-10.19 15 d96705a1exv10w19.txt REGULATIONS OF HY-BON ROTARY COMPRESSION LLC EXHIBIT 10.19 REGULATIONS OF HY-BON ROTARY COMPRESSION, L.L.C. In accordance with Texas Limited Liability Company Act, the managers named in the articles of organization of HY-BON ROTARY COMPRESSION, L.L.C., "the Company" adopt the following Regulations. PURPOSE 1. The purpose for which the Company is organized is to engage in selling and leasing gas compressor equipment. POWER TO SPECIFY REGULATIONS 2. The power to adopt, alter, amend, or repeal the regulations is entirely vested in the managers named in the articles of organization. EXECUTION OF DOCUMENTS 3. The managers have the authority to execute documents and instruments for the sale and lease of gas compressor equipment on behalf of the company. MANAGEMENT RIGHTS 4. The right to exercise the powers of the Company and to manage the business and affairs of the Company is vested entirely in the managers as listed in the articles of organization. NUMBER OF MANAGERS AND ELECTION OF MANAGERS 5. The initial managers specified in the articles of organization shall serve as managers until the next annual meeting of members. CLASSES OR SERIES OF MEMBERSHIP VOTING INTERESTS 6. Holders of any class or series of membership interest with respect to voting rights are entitled to elect managers. CLASSIFICATION OF MANAGERS 7. After the term of initial managers as specified in the articles of organization expires, the members shall re-elect them and/or new managers as appropriate. REMOVAL OF MANAGER BY CONSENT OF MEMBERS 8. At any meeting of members called expressly for the purpose, any manager may be removed for any reason, with or without cause, on a resolution adopted by the members. QUORUM OF MANAGERS 9. At all meetings of the managers, 75% of the managers constitutes a quorum for the transaction of business. ACTION BY MANAGERS 10. An act of the managers is effective if 75% of the managers vote approval of the act at a meeting at which a quorum of managers is present. MANAGER COMMITTEES 11. By resolution, the managers may designate from among the managers one or more committees that may exercise the authority of the managers generally, and may designate one or more managers to serve as alternate members of any committee. A committee may not amend the regulations. REGULAR MEETINGS OF MANAGERS 12. Regular meetings of the managers shall be held at the principal office of the Company. By resolution, the managers are authorized to designate, from time to time, a place or places other than that specified above as the place for regular meetings of the managers. Regular meetings of the managers shall be held immediately following the annual meeting of the members, and on the first Thursday of each month at 10:00 a.m. If a Thursday specified for the holding of a regular meeting is a legal holiday, then that meeting shall be held at the same time on the next day that is not a legal holiday or a Saturday or Sunday. No notice of regular meetings is required. SPECIAL MEETINGS OF MANAGERS 13. Special meeting called by action of the managers shall be held at the principal office of the Company. Written notice of the time and place of special meetings shall be delivered personally to the managers or sent to each manager by U.S. mail or facsimile machine at the manager's address as shown on the records of the Company. Notice that is mailed must be deposited in the U.S. mail at least 46 hours prior to the time of the holding of the meeting. NOTICE OF PURPOSE OF MEETINGS 14. Notice of any meetings of the managers shall specify the purpose of the meeting or the business to be transacted at the meeting, in addition to the place, date, and time of meeting. REQUESTS FOR RECORDS 15. All requests by members or assignees, of a membership interest for copies of Company records must be sent to James J. Woodcock, P. 0. Box 4185, Midland, Texas 79704. NEW MEMBERS 16. A person may become a member of the Company if adopted by a vote of two-thirds (2/3) of the existing members; provided that the person makes a contribution to the Company in an amount equal to the minimum amount of initial and additional contribution for any member specified in Paragraph 16. 2 CLASSES OF MEMBERS 17. The following classes of members are established by these regulations: (a) Class I: (i) Consists of the following members: NGE Leasing, inc., 2911 South County Road 1280, Midland, Texas 79706; Hy-Bon Engineering Company, inc., P. O. Box 4185, Midland, Texas 79704. (ii) Each member has the power to control all aspects of production of the material sold by the Company, including the acquisition, maintenance, repair, and replacement of the physical assets of the Company. (iii) Each member, at each regular meeting of the members, must make a full report of all material acquired and produced by Company. VOTE ON ACTION BY MEMBERS 18. An act of the members of record is effective if the majority of members' votes adopt the act at a meeting at which a quorum of members is present, in accordance with the following voting regulations; (a) Each member is entitled to one vote. (b) For any meeting at which a matter is to be voted on by the members, the Company must give to each member notice of the time, place, arid purpose of a meting. Written notice of the time and place of meetings shall be delivered personally to the managers or sent to each manager by U.S. mail or facsimile machine at the manager's address as shown -on the records of the Company. For mailed notice, the notice must be deposited in the U.S. mail at least seven days prior to the time the meeting is held). (c) Action taken at any meeting of the members without the required notice is as valid as though made at a meeting after notice if a quorum is present and each of the members not present signs a written waiver of notice or a consent to the holding of that meeting, Attendance of a member at a meeting constitutes waiver of notice of the meeting unless the member attends the meeting for the express purpose or objecting to the transaction of business on the grounds that the meeting is not lawfully convened. (d) Any action permitted to be taken by the members may be taken without a meeting if all members individually or collectively consent by signing a writing approving of the action. Any action by written consent has the same force and effect as a unanimous vote of the members. (e) Only persons whose names are listed as members in the official records of the Company 30 days before any meeting of the members are entitled to notice of or to vote at that meeting. 3 (f) At all meetings of the members, two members shall be necessary and sufficient to constitute a quorum for the transaction of business. (g) Members may vote either in person or by proxy. Proxies must be executed in writing by the members. A telegram, telex, cablegram, or similar transmission by the shareholder, or a photographic, photostatic, facsimile, or similar reproduction of a writing executed by a member is deemed an execution in writing for purposes of this regulation. LIABILITY OF MEMBER OR MANAGERS TO THIRD PARTIES 19. A member or manager is not liable for the debts, obligations, or liabilities of the Company, including liability under a judgment decree or order of a court. ASSIGNMENT OF MEMBERSHIP INTEREST 20. A member may not assign the member's interest in the membership except with the written consent of all of the other members of record. if a consent is obtained, a member may assign the member's interest only in its entirety. Except as specified in Paragraph 23 of these Regulations, any assignment automatically entitles the assignee to become a member. RIGHTS OF ASSIGNEE TO BECOME MEMBER 21. An assignee of a membership interest does not become a member of the Company except with the written consent of all of the other members of record. OBLIGATIONS OF MEMBER BY ASSIGNMENT 22. A person who becomes a member as a result of an assignment of a membership interest assumes all of the obligations of the assignor, including liabilities unknown to the assignee at the time the assignee becomes a member. CERTIFICATES OF MEMBERSHIP INTEREST 23. The Company is authorized to issue membership interest certificates. Membership interests may be assigned or transferred by delivery of the certificates, and possession of the certificates constitutes absolute ownership rights in the membership interest described on the certificates. 24. Except as specified in Paragraph 28 of these Regulations, a member of record has an absolute obligation to perform an enforceable promise to make a contribution, or otherwise pay cash or transfer property owed to the Company. However, a member's representative or member's successor in interest is relieved of such obligation in the event of the member's death or complete disability. PENALTIES FOR MEMBER'S FAILURE TO MAKE CONTRIBUTION 25. In the event a member fails to make a contribution to the limited liability Company required by an enforceable promise, the Company is entitled to take any of the following actions: 4 (a) Reduce the defaulting members interest in a proportion that the amount of the default bears to the total contribution of the member. (b) Require that the member forfeit the members interest. (c) Subordinate the member's interest to that of all other members of record. (d) Force sale of the member's interest. (e) Lend money to the defaulting member by other members at an interest rate of 12 percent in an amount necessary to satisfy the amount of the default. (f) Determine the value of the defaulting member's interest by appraisal or by formula and sell the interest. 26. On written consent of all of the other members of record, the Company may release or compromise the following obligations of a member, a member's legal representative, or a members successor. (a) An obligation to make a contribution or otherwise pay cash or transfer property to the Company. (b) An obligation to return cash or property paid or distributed to the member in violation of the Taxes Limited Liability Company Act or these regulations. BASIS OF DISTRIBUTIONS 27. The amount of cash and other assets shall be distributed to each member based on the current percentage interest of the member. As used in these Regulations, the "current percentage interest" is the agreed value of contributions to the Company that have been made by the member divided by the total of all contributions made to the Company by all members, as specified in the records of the Company and as determined as of the date of the Company's most recent accounting. WITHDRAWAL OF MEMBER 28. (a) A member of the Company may withdraw as a member. (i) When the member gives 60 days' written notice to all of the other members of record. (ii) When the member assigns the members interest in the Company in accordance of these Regulations]. (b) A member of the Company ceases to be a member, and is deemed to have withdrawn from the Company, on the occurrence of any of the following events; (i) When the member files a voluntary bankruptcy petition. 5 (ii) If the member is a natural person, the death of the member or an adjudication of a court of competent jurisdiction that the member is incompetent to manage his or her person or property. (iii) If the member is a corporation, on the filing of a certificate of dissolution of the corporation or the revocation of the corporation's charter. (iv) If the member is an estate, on the personal representative's distribution of the estate's entire interest in the Company. DISTRIBUTION ON WITHDRAWAL 29. Within a reasonable time after withdrawal, a withdrawing member is entitled to receive: (a) The net book value of the member's interest in the Company as recorded in the last regular accounting preceding the withdrawal; and (b) The value of the member's interest in the goodwill of the Company, as determined by capitalizing 25 percent of the withdrawing member's distributive share of the average annual profits of the Company during its preceding five (5) taxable years. DISTRIBUTIONS IN KIND 30. The company may make a distribution in a form other than cash. However, no partner may be compelled to accept a disproportion of assets in kind from the Company to the extent that the portion of assets distributed to the member exceeds the member's ownership percentage of the Company. The undersigned managers have adopted these Regulations on July 9, 2001. NGE LEASING, INC. BY: /s/ SCOTT SPARKMAN ---------------------------- PRINTED NAME: SCOTT SPARKMAN ------------------ TITLE: PRESIDENT ------------------------- HY-BON ENGINEERING COMPANY, INC. /s/ JAMES D. ROSS -------------------------------- PRINTED NAME: JAMES D. ROSS ------------------ PRINTED NAME: JAMES D. ROSS ------------------ TITLE: CHIEF FINANCIAL OFFICER ------------------------- 6 EX-23.1 16 d96705a1exv23w1.txt CONSENT OF HEIN + ASSOCIATES LLP EXHIBIT 23.1 INDEPENDENT AUDITOR'S CONSENT We consent to the use in the Registration Statement and Prospectus of Natural Gas Services Group, Inc. of our reports dated March 14, 2002 and July 31, 2001 accompanying the financial statements of Natural Gas Services Group, Inc. and the statements of revenue and direct operating expenses of assets acquired by Great Lakes Compression, Inc. respectively, contained in such Registration Statement, and to the use of our name and the statements with respect to us, as appearing under the heading "Experts" in the Prospectus. HEIN & ASSOCIATES LLP Dallas Texas July 16, 2002 -----END PRIVACY-ENHANCED MESSAGE-----