SECURITY AGREEMENT

(Stock)




THIS SECURITY AGREEMENT (“Agreement”) dated as of February 2, 2005, is made by and between NATURAL GAS SYSTEMS, INC., a Delaware corporation (“Pledgor”), and PROSPECT ENERGY CORPORATION, a Maryland corporation (“Lender”), who agree as follows:

 

RECITALS




A. The Pledgor is a subsidiary of Natural Gas Systems, Inc., a Nevada corporation (the “Borrower”). The Borrower is or will be indebted unto the Lender for loans made or to be made pursuant to the terms of a loan agreement (as amended, supplemented or restated from time to time, the “Loan Agreement”) dated as of February 2, 2005, by and between the Borrower and the Lender.




B. In order to secure the Borrower’s full and punctual payment and performance of the Indebtedness as defined in the Loan Agreement, the Pledgor has agreed to execute and deliver this Agreement and to pledge, deliver and grant a continuing security interest in and to the Collateral (as hereafter defined).




AGREEMENT




NOW, THEREFORE, in consideration of the premises, the Pledgor and the Lender agree as follows:

 

Section 1. Definitions. (A) As used in this Agreement, the terms “Agreement”, “Borrower”, “Lender”, “Loan Agreement” and “Pledgor” shall have the meanings indicated above.

 

(B) As used in this Agreement, the terms “Event of Default”, “Indebtedness” and “Person” have the respective meanings defined in the Loan Agreement.

 

(C) As used in this Agreement, the terms “NGS Sub” and “Subsidiary” shall have the meanings indicated in Section 2 below.

 

Section 2. Security Interest. (A) To secure the Borrower’s full and punctual payment and performance of all present and future Indebtedness to the Lender or any successor or transferee thereof, including without limitation all promissory notes heretofore or hereafter executed by the Borrower pursuant to the Loan Agreement, in principal, interest, deferral and delinquency charges, prepayment premiums, costs and attorney’s fees, as therein stipulated, or under or pursuant to any present or future hedging or derivative agreements relating to interest rates, currency exchange rates or commodity prices (such as any swap agreement, any cap,
collar, floor, exchange or forward transaction, any option, or other similar transaction), the Pledgor hereby pledges, pawns, transfers and grants to the Lender a continuing security interest in and to all of the following property of the Pledgor, whether now owned or existing or hereafter acquired or arising (collectively the “Collateral”):




 



	 
	 	 	 
	





	 







One Hundred Thousand (100,000) shares of the common stock of NGS Sub. Corp., a Delaware corporation (“NGS Sub”) represented by Certificate No. CS-i dated September 26, 2003, registered in the Pledgor’s name, together with any additional shares of NGS Sub issued hereafter as stock dividends, stock splits or otherwise, or shares received as a result of any merger or consolidation of NGS Sub, all rights of any nature whatsoever which may be issued or granted by NGS Sub to the Pledgor, all right, title and interest of the Pledgor as a shareholder of NGS Sub including without limitation the right to vote, all certificates and instruments representing or evidencing all such shares and rights, all cash, liquidation and other dividends now or hereafter declared thereon, all stock redemption
payments and all other monies due or to become due thereunder, all stock warrants and other rights to subscribe to securities now or hereafter incident thereto or declared or granted in connection therewith, and all distributions (cash or property) made or to be made in connection therewith or incident thereto, and together with all proceeds of all or any of the foregoing, in whatever form.




NGS Sub is hereinafter sometimes referred to as the “Subsidiary”.




(C) The security interests are granted as security only and shall not subject the Lender to, or transfer or in any way affect or modify, any obligation or liability of the Pledgor with respect to any of the Collateral or any transaction in connection therewith.




Section 3. Delivery of Collateral. The Lender hereby accepts the delivery of the Collateral on behalf of itself and on behalf of any future transferee of the Indebtedness. The Pledgor will execute and deliver to the Lender all assignments, endorsements, powers and other documents reasonably requested at any time and from time to time by the Lender with respect to the Collateral and the rights and powers granted to the Lender hereunder, and will deliver to the Lender any stock certificates representing stock dividends on, or stock splits of, any of the Collateral.

 

Section 4. Representations. (A) The Pledgor has not performed any acts or signed any agreements which might prevent the Lender from enforcing any of the terms of this Agreement or which would limit the Lender in any such enforcement. No security agreement or similar or equivalent document or instrument covering all or any part of the Collateral has been executed by the Pledgor and remains in effect. No Collateral is in the possession of any Person (other than the Pledgor) asserting any claim thereto or security interest therein, except that the Lender or its designee may have possession of Collateral as contemplated hereby.

 

(B) The certificated securities evidencing the Collateral are each owned legally, directly and beneficially and of record by the Pledgor, and each is not subject to any interest, option or right of any Person. The Collateral constitutes all of the interest that the Pledgor owns in the Subsidiary, which as of the date of this Agreement is one hundred (100%) percent of the stock issued by the Subsidiary. The Pledgor has delivered a complete and accurate copy of the Subsidiary’s articles of incorporation and bylaws to the Lender.




Section 5. Covenants. (A) The Pledgor agrees not to sell, offer to sell,








	 
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transfer or otherwise dispose of any of the Collateral or any interest therein, and not to create, incur or permit to exist any pledge, security interest, lien, charge, encumbrance, restriction on transfer, right to purchase, option, right of first refusal or other impediment to title whatsoever with respect to any of the Collateral, other than this Agreement.




(B) The Pledgor will not amend or agree to amend the Subsidiary’s articles of incorporation or bylaws, or otherwise enter into any further agreement pertaining to any of the Collateral. The Pledgor will not consent to or permit the issuance to any Person of any additional shares in the Subsidiary.




Section 6. Voting Rights. (A) So long as no Event of Default as defined in the Loan Agreement shall have occurred, the Pledgor shall have the right, from time to time, to exercise voting and other consensual rights to give approvals, ratifications and waivers pertaining to the Collateral, and the Lender upon receiving a written request from the Pledgor and the Borrower accompanied by a certificate stating that no Event of Default has occurred will deliver to the Pledgor (or as specified in such request) such proxies, approvals, ratifications, waivers and other instruments pertaining to the Collateral as may be specified in such request and be in form

and substance satisfactory to the Lender.




(B) Upon the occurrence of an Event of Default, the Lender shall have the right, at Lender’s option, to exercise the voting and other consensual rights to give approvals, ratifications and waivers and to take any other action with respect to all the Collateral with the same force and effect as if the Lender were the absolute and sole owner thereof, and the Pledgor’s right to exercise such voting and other consensual rights shall, at Lender’s option, cease and become vested in the Lender.




Section 7. Remedies upon Default. (A) Upon the occurrence of an Event of Default as defined in the Loan Agreement the Lender may exercise all rights of a secured party under the Louisiana Commercial Laws - - Secured Transactions and other applicable law (including the Uniform Commercial Code as in effect in another applicable jurisdiction) and, in addition, the Lender may, without being required to give any notice, except as herein provided or as may be required by
mandatory provisions of law, (i) transfer the whole or any part of the Collateral into the name of the Lender or its nominee, (ii) sell the Collateral or any part thereof at a broker’s board or on a securities exchange, or (iii) sell the Collateral or any part thereof at public or private sale, for cash, upon credit or for future delivery, and at such price or prices as the Lender may deem satisfactory. The Lender may be the purchaser of any or all of the Collateral so sold at any public sale (or, if the 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, at any private sale). The Pledgor will execute and deliver such documents and take such other action as the Lender deems necessary or advisable in order that any such sale may be made in compliance with law. Upon any such sale the Lender shall have the right to deliver, assign and transfer to the purchaser thereof the Collateral so sold. Each
purchaser at any such sale shall hold the Collateral so sold to it absolutely and free from any claim or right of whatsoever kind, including any equity or right of redemption of the Pledgor which may be waived, and the Pledgor, to the extent permitted by law, hereby specifically waives all rights of











	 
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redemption, stay or appraisal which it has or may have under any law now existing or hereafter adopted. The Pledgor agrees that ten (10) days prior written notice of the time and place of any sale or other intended disposition of any of the Collateral constitutes “reasonable notification” within the meaning of Sections 9-611 and 9-612 of the UCC except that shorter or no notice shall be reasonable as to any Collateral which is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market. The notice (if any) of such sale shall (1) in case of a public sale, state the time and place fixed for such sale, and (2) in the case of a private sale, state the day after which such sale may be consummated. Any such public sale shall be held at such time or times
within ordinary business hours and at such place or places as the Lender may fix in the notice of such sale. At any such sale the Collateral may be sold in one lot as an entirety or in separate parcels, as the Lender may determine. The Lender shall not be obligated to make any such sale pursuant to any such notice. The Lender may, without notice or publication, 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 case of any sale of all or any part of the Collateral on credit or for future delivery, the Collateral so sold may be retained by the Lender until the selling price is paid by the purchaser thereof, but the Lender shall not incur any liability in case of the failure of such purchaser to take up and pay for the Collateral so sold and, in case of any such failure, such Collateral may again be sold upon like
notice.




(B) The Lender, instead of exercising the power of sale herein conferred upon it, may proceed by a suit or suits at law or in equity to foreclose the security interests and sell the Collateral, or any portion thereof, under a judgment or decree of a court or courts of competent jurisdiction. For the purposes of Louisiana executory process procedures, the Pledgor does hereby acknowledge the Indebtedness and confess judgment in favor of the Lender for the full amount of the Indebtedness. The Pledgor does by these presents consent, agree and stipulate that upon the occurrence of an Event of Default it shall be lawful for the Lender, and the Pledgor does

hereby authorize the Lender, to cause all and singular the Collateral to be seized and sold under executory or ordinary process, at the Lender’s sole option, without appraisement, appraisement being hereby expressly waived, in one lot as an entirety or in separate parcels as the Lender may determine, to the highest bidder, and otherwise exercise the rights, powers and remedies afforded herein and under applicable Louisiana law. Any and all declarations of fact made by authentic act before a Notary Public in the presence of two witnesses by a person declaring that such facts lie within his knowledge shall constitute authentic evidence of such facts for the purpose of executory process. The Pledgor hereby waives in favor of the Lender: (a) the benefit of appraisement as provided in Louisiana Code of Civil Procedure Articles 2332, 2336, 2723 and 2724, and all other laws conferring the same; (b) the demand and three days delay accorded by Louisiana Code of Civil Procedure Article 2721; (c) the notice

of seizure required by Louisiana Code of Civil Procedure Articles 2293 and 2721; (d) the three days delay provided by Louisiana Code of Civil Procedure Articles 2331 and 2722; and (e) the benefit of the other provisions of Louisiana Code of Civil Procedure Articles 2331, 2722 and 2723, not specifically mentioned above.




(C) The Pledgor recognizes that the Lender may be unable to effect a public sale of all or part of the Collateral by reason of certain prohibitions contained in the Securities











	 
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Act of 1933, as amended, and applicable state securities laws but may be compelled to resort to one or more private sales to a restricted group of purchasers who will be obligated to agree, among other things, to acquire all or a part of the Collateral for their own account, for investment, and not with a view to the distribution or resale thereof. If the Lender deems it advisable to do so for the foregoing or for other reasons, the Lender is authorized to limit the prospective bidders on or purchasers of any of the Collateral to such a restricted group of purchasers and may cause to be placed on certificates for any or all of the Collateral a legend to the effect that such security has not been registered under the Securities Act of 1933, as amended, and may not be disposed of in violation of the provision
of said act, and to impose such other limitations or conditions in connection with any such sale as the Lender deems necessary or advisable in order to comply with said act or any other securities or other laws. The Pledgor acknowledges and agrees that any private sale so made may be at prices and on other terms less favorable to the seller than if such Collateral were sold at public sale and that the Lender has no obligation to delay the sale of such Collateral for the period of time necessary to permit the registration of such Collateral for public sale under any securities laws. The Pledgor agrees that a private sale or sales made under the foregoing circumstances shall be deemed to have been made in a commercially reasonable manner. If any consent, approval, or authorization of any federal, state, municipal or other governmental department, agency or authority should be necessary to effectuate any sale or other disposition of the Collateral, or any partial sale or other disposition of the
Collateral, the Pledgor will execute all applications and other instruments as may be required in connection with securing any such consent, approval or authorization and will otherwise use its best efforts to secure same. In addition, if the Collateral is disposed of pursuant to Rule 144, the Pledgor agrees to complete and execute a Form 144, or comparable successor form, at the Lender’s request; and the Pledgor agrees to provide any material adverse information in regard to the current and prospective operations of any corporation whose stock constitutes all or a portion of the Collateral of which the Pledgor has knowledge and which has not been publicly disclosed, and the Pledgor hereby acknowledges that the Pledgor’s failure to provide such information may result in criminal and/or civil liability.




Section 8. Limitation on Duty of Lender. Beyond the exercise of reasonable care in the custody thereof, the Lender shall have no duty as to any Collateral in its possession or control or in the possession or control of any agent or bailee or any income thereon. The Lender shall be deemed to have exercised reasonable care in the custody of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which it accords its own property, and shall not be liable or responsible for any loss or damage to any of the Collateral, or for any diminution in the value thereof, by reason of the act or omission of any broker or

other agent or bailee selected by the Lender in good faith. The Lender shall be deemed to have exercised reasonable care with respect to any of the Collateral in its possession if the Lender takes such action for that purpose as the Pledgor shall reasonably request in writing; but no failure to comply with any such request shall, of itself, be deemed a failure to exercise reasonable care.

 

Section 9. Appointment of Agent. At any time or times, in order to comply with any legal requirement in any jurisdiction, the Lender may appoint a bank or trust company or one or more other Persons with such power and authority as may be necessary for the











	 
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effectual operation of the provisions hereof and may be specified in the instrument of appointment.




Section 10. Expenses. In the event that the Borrower fails to comply with any provisions of the Loan Agreement or the Pledgor fails to comply with any provisions of this Agreement, such that the value of any Collateral or the validity, perfection, rank or value of any security interest hereunder is thereby diminished or potentially diminished or put at risk, the Lender may, but shall not be required to, effect such compliance on behalf of the Borrower and/or the Pledgor, and the Pledgor shall reimburse the Lender for the costs thereof on demand. All insurance expenses and all expenses of protecting, storing, appraising, preparing for sale, handling, maintaining and shipping the Collateral, any and all excise, property, sales, and use taxes imposed by any federal, state or local authority on any of the
Collateral, all expenses in respect of periodic appraisals and inspections of the Collateral to the extent the same may be requested from time to time, and all expenses in respect of the sale or other disposition thereof shall be borne and paid by the Pledgor; and if the Pledgor fails to promptly pay any portion thereof when due, the Lender may, at its option, but shall not be required to, pay the same and charge the Pledgor’s account therefor, and the Pledgor agrees to reimburse the Lender therefor on demand. All sums so paid or incurred by the Lender for any of the foregoing and any and all other sums for which the Pledgor may become liable hereunder and all costs and expenses (including reasonable attorneys’ fees, legal expenses and court costs) incurred by the Lender in enforcing or protecting any of the rights or remedies under this Agreement, together with interest thereon until paid at the Default Rate, shall be additional Indebtedness under the Loan Agreement and the Pledgor agrees
to pay all of the foregoing sums promptly on demand.

 

Section 11. Termination. Upon the payment in full of the Indebtedness and the termination of the Loan Agreement, this Agreement shall terminate. Upon request of the Pledgor, the Lender shall deliver the remaining Collateral (if any) to the Pledgor.




Section 12. Notices. Any notice or demand which, by provision of this Agreement, is required or permitted to be given or served to the Pledgor and the Lender shall be deemed to have been sufficiently given and served for all purposes if made in accordance with the Loan Agreement. For purposes of this Section 12, any notice or demand to be given or served to the Pledgor shall be sent to the following address (until another address or addresses is given in writing by the Pledgor to the other parties):




If to Pledgor:    Natural Gas Systems, Inc.

Two Memorial City Plaza 

820 Gessner, Suite 1340 

Houston, Texas 77024

 

Attention: Robert S. Herlin, President

 

Facsimile Number: (713) 935-0199 

Telephone Number: (713) 935-0122











	 
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Section 13. Amendment. Neither this Agreement nor any provisions hereof may be changed, waived, discharged or terminated orally or in any manner other than by an instrument in writing signed by the party against whom enforcement of the change, waiver, discharge or termination is sought.




Section 14. Waivers. No course of dealing on the part of the Lender, its officers, employees, consultants or agents, nor any failure or delay by the Lender with respect to exercising any of its rights, powers or privileges under this Agreement shall operate as a waiver thereof.




Section 15. Cumulative Rights. The rights and remedies of the Lender under this Agreement shall be cumulative and the exercise or partial exercise of any such right or remedy shall not preclude the exercise of any other right or remedy.




Section 16. Titles of Sections. All titles or headings to sections of this Agreement are only for the convenience of the parties and shall not be construed to have any effect or meaning with respect to the other content of such sections, such other content being controlling as to the agreement between the parties hereto.




Section 17. GOVERNING LAW. THIS AGREEMENT IS A CONTRACT MADE UNDER AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE UNITED STATES OF AMERICA AND THE STATE OF LOUISIANA.




Section 18. Successors and Assigns. All covenants and agreements contained by or on behalf of the Pledgor in this Agreement shall bind the Pledgor’s successors and assigns and shall inure to the benefit of the Lender and its successors and assigns. This Agreement is for the benefit of the Lender and for such other Person or Persons as may from time to time become or be the holders of any of the Indebtedness, and this Agreement shall be transferable with the same force and effect and to the same extent as the Indebtedness may be transferable, it being understood that, upon the transfer or assignment by the Lender of any of the Indebtedness, the
legal holder of such Indebtedness shall have all of the rights granted to the Lender under this Agreement. The Pledgor specifically agrees that upon any transfer of all or any portion of the Indebtedness, the Lender may transfer and deliver the Collateral to the transferee of such Indebtedness and the Collateral shall secure any and all of the Indebtedness in favor of such a transferee, that such transfer of the Collateral shall not affect the priority and ranking thereof, and that the Collateral shall secure with retroactive rank the then existing Indebtedness of the Borrower to the transferee and any and all Indebtedness thereafter arising. After any such transfer has taken place, the Lender shall be fully discharged from any and all future liability and responsibility to the Pledgor with respect to the Collateral and the transferee thereafter shall be vested with all the powers, rights and duties with respect to the Collateral.




Section 19. Counterparts. This Agreement may be executed in two or more counterparts, and it shall not be necessary that the signatures of all parties hereto be contained on any one counterpart hereof, each counterpart shall be deemed an original, but all of which when taken together shall constitute one and the same instrument.


 



	 
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[Remainder of Page Intentionally Blank; Signature Page Follows]




 




 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



	 
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N WITNESS WHEREOF, the Pledgor and the Lender have caused this Agreement to be duly executed as of the date first above written.




PLEDGOR: NATURAL GAS SYSTEMS, INC., 

a Delaware corporation




BY:                                              

Name: 

Title:

 

LENDER: PROSPECT ENERGY 

CORPORATION, 

a Maryland corporation





BY:                                              

Name: 

Title:

 

 

 

 

 

 

 



	 
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