MORTGAGE,
      COLLATERAL
	
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       UNITED
      STATES OF AMERICA

	
      ASSIGNMENT,
      SECURITY
	 	 
	
        AGREEMENT
      AND
	
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       STATE
      OF

	
      FINANCING
      STATEMENT
	 	 
	 	
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       COUNTY/PARISH
      OF____________

	
       BY
	 	 
	 	
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       NGS
      SUB. CORP.
	 	 
	 	
      *
	 



 


	
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BE
IT KNOWN, that on this 2nd day of February, 2005, before me, the undersigned
Notary Public duly commissioned and qualified, personally came and
appeared:




NGS
SUB. CORP., a Delaware corporation (the “Mortgagor”), having a mailing address
of 820 Gessner, Suite 1340, Houston, Texas 77024, and a federal taxpayer
identification number with the last four digits of _____,
appearing
herein by and through its undersigned officer, duly authorized by resolutions of
its Board of Directors, a certified copy of which is attached
hereto,




who
declared that Mortgagor does by these presents declare and acknowledge an
indebtedness unto:




PROSPECT
ENERGY CORPORATION, a Maryland corporation (the “Lender”) having a place of
business at 10 East 40th Street, Suite 4400, New York, New York
10016, and a federal taxpayer identification number with the last four digits of
__________.




RECITALS

 

A.
Natural Gas Systems, Inc., a Nevada corporation (the “Borrower”) is indebted
unto the Lender for loans made and to be made pursuant to the terms of a certain
loan agreement (as amended, supplemented or restated from time to time, and all
other agreements given in substitution therefor, or in renewal, extension or
restatement thereof, in whole or in part, being herein called the “Loan
Agreement”) dated as of February 2, 2005, by and between the Borrower and the
Lender.




B.
From time to time Borrower will make a portion of the proceeds of the loans
available to Mortgagor for the acquisition of properties and working capital
purposes, and therefore the making of such loans by Lender to Borrower will be
of substantial benefit to Mortgagor, and consequently in order to secure the
full and punctual payment and performance of the Indebtedness (as hereafter
defined), the Mortgagor has agreed to execute and deliver this




 































Mortgage
and to grant a mortgage lien and continuing security interest in and to the
Collateral (as
hereafter defined).




ARTICLE
1




GENERAL
TERMS




Section
1.1 Definitions. As used in this Mortgage, the terms “Borrower”, “Lender”,
“Loan Agreement” and “Mortgagor” shall have the meanings indicated above. As
used in this Mortgage, the following additional terms shall have the meanings
indicated:

 

“Accounts”
means all “accounts” (as defined in the UCC) now owned or hereafter acquired by
the Mortgagor, including without limitation accounts resulting from the sale of
Hydrocarbons at the welihead and accounts now or hereafter arising in connection
with the sale or other disposition of any Hydrocarbons, and all revenues and
rights to payment relating to the Mortgagor’s compensation for services as
operator of any Mineral Properties or to joint interest billings or to amounts
recoverable by the Mortgagor from nonoperating parties by virtue of nonconsent
elections or otherwise, and further means all rights accrued, accruing or to
accrue to receive payments of any and every kind under all Contracts, including
without limitation bonuses, rents and royalties which are payable out of or
measured by production of any Hydrocarbons or are otherwise attributable to the
Mineral Properties and all other revenues owing to the Mortgagor in connection
with the Mineral Properties, including revenues from the treatment,
transportation or storage of Hydrocarbons for third parties.




“Advances”
has the meaning set forth in Section 4.8 (“Advances by Lender”) of this
Mortgage.




“Collateral”
has the meaning set forth in Section 2.2 (“The Security Interests”) of this
Mortgage.




“Collateral
Account” has the meaning set forth in Section 5.3
(“Collateral
Account”) of this Mortgage.




“Collateral
Documents” means collectively all mortgages, deeds of trust, pledges, security
agreements and other documents by which the Mortgagor or the Borrower grants
Liens and security interests in immovable or movable property to the
Lender.

 











2
















“Contracts”
means (a) all contracts and agreements described in Exhibit A and Exhibit B and
all other contracts, operating agreements, farm-out or farm-in agreements,
sharing agreements, limited or general partnership agreements, area of mutual
interest agreements, mineral purchase agreements, contracts for the sale,
exchange, transportation or processing of Hydrocarbons, rights-of-way,
easements, surface leases, salt water disposal agreements, service contracts,
permits, franchises, licenses, pooling or unitization agreements, unit
designations and pooling orders now in effect or hereafter entered into by the
Mortgagor affecting any of the Mineral Properties, Equipment or Hydrocarbons now
or hereafter covered hereby, or which are useful or appropriate in drilling for,
producing, treating, handling, storing, transporting or marketing oil, gas or
other minerals produced from any lands affected by the Mineral Properties and
(b) all rights and choses in action (i.e., rights to enforce contracts or to
bring claims thereunder) relating to the foregoing, regardless of whether the
same arose or arise, or the events giving rise thereto occurred or occur on,
before or after the date hereof.




“Default”
means the occurrence of any of the events specified as an Event of Default,
whether or not any requirement for notice or lapse of time or other condition
precedent has been satisfied.






“Equipment”
means all equipment now owned or hereafter acquired by the Mortgagor, now or
hereafter located on or used in connection with the Mineral Properties or in
connection with the operation thereof or the treating, handling, storing,
transporting, processing, purchasing, exchanging or marketing of Hydrocarbons,
including without limitation all wells, rigs, platforms, constructions,
extraction plants, facilities, gas systems (for gathering, treating, injection
and compression), water systems (for treating, disposal and injection),
compressors, casing, tubing, rods, flow lines, pipelines, derricks, tanks,
separators, pumps, machinery, tools and all other movable property and fixtures
now or hereafter located upon and dedicated to be used in connection with any of
the Mineral Properties, together with all additions, accessories, parts,
attachments, special tools and accessions now and hereafter affixed thereto or
used in connection therewith, and all replacements thereof and substitutions
therefor.




 

“Event
of Default” has the meaning set forth in Section 5.1 (“Events Of Default”) of
this Mortgage.














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“General
Intangibles” means all “general intangibles” (as defined in the UCC) now owned
or hereafter acquired by the Mortgagor related to the Mineral Properties, the
Equipment or the Hydrocarbons, the operation of the Mineral Properties or the
Equipment (whether the Mortgagor is operator or non-operator), or the treating,
handling, storing, transporting, processing, purchasing, exchanging or marketing
of Hydrocarbons, or under which the proceeds of Hydrocarbons arise or are
evidenced or governed, and further including, without limitation, (i) all
contractual rights and obligations or indebtedness owing to the Mortgagor (other
than Accounts) from whatever source arising in connection with the sale or other
disposition of any Hydrocarbons, including all rights to payment owed or
received by the Mortgagor pursuant to a “take-or-pay” provision or gas balancing
arrangement, (ii) all Contracts and other general intangibles now or hereafter
arising in connection with or resulting from Contracts, (iii) all insurance
proceeds and unearned insurance premiums affecting all or any part of the
Collateral, and (iv) all amounts received in judgment, settlement, assignment or
otherwise of claims or litigation and all things in action, rights represented
by judgments, claims arising out of tort and other claims relating to the
Collateral, including the right to assert and otherwise to be the plaintiff and
proper party of interest to commence, control, prosecute and settle such action
(whether as claims, counterclaims or otherwise, and whether involving matters
arising from casualty, condemnation, indemnification, negligence, strict
liability, other tort, contract or in any other manner).




“Hydrocarbons”
mean all oil, gas, casing head gas, condensate, distillate, other liquid and
gaseous hydrocarbons, sulfur, and all other minerals, whether similar to the
foregoing or not, produced, obtained or secured from or allocable to the Mineral
Properties, and any products refined, processed, recovered or obtained
therefrom, including oil in tanks.




“Indebtedness”
means all present and future amounts, liabilities or obligations of the Borrower
or the Mortgagor to the Lender (or to any successor or transferee of the Note),
including without limitation any such amounts, liabilities or obligations under
or pursuant to the Loan Agreement, the Note, this Mortgage or the other
Collateral Documents, whether said amounts, liabilities or obligations are
liquidated or unliquidated, now existing or hereafter arising, and including
without limitation the Note and all other promissory notes heretofore or
hereafter executed by the














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Borrower
pursuant to the Loan Agreement, in principal, interest, deferral and delinquency
charges, prepayment premiums, costs and attorneys’ fees, as therein stipulated,
and under and pursuant to all amendments, supplements and restatements to any of
said documents. The Indebtedness includes without limitation all Advances and
other amounts for which the Mortgagor is obligated under the terms of this
Mortgage. The Indebtedness also includes, without limitation, all post-petition
interest, expenses, and other duties and liabilities with respect to
indebtedness or other obligations described above, which would be owed but for
the fact that they are unenforceable or not allowable due to the existence of a
bankruptcy, reorganization, or similar proceeding. The Indebtedness secured by
this Mortgage further continues with respect to any renewals, modifications,
amendments, revisions or extensions of the Indebtedness. It is contemplated and
acknowledged that the Indebtedness may include future advances or revolving
credit loans and advances from time to time, and that this Mortgage shall have
effect, as of the date hereof, to secure all Indebtedness, regardless of whether
any amounts are advanced on the date hereof or on a later date or, whether
having been advanced, are later repaid in part or in whole and further advances
made at a later date. The Indebtedness secured by this Mortgage further
continues with respect to any new obligation arising from any novation
(subjective or objective) of the Indebtedness as permitted by Louisiana Civil
Code Article 1884, as well as to any other renewals, modifications, amendments,
revisions or extensions ofthe Indebtedness.




“Instruments”
means all instruments (as defined in the UCC) now owned or hereafter acquired by
the Mortgagor arising in connection with any Accounts, or under or in connection
with any Contracts or other General Intangibles, or otherwise in connection with
the sale or other disposition of any Hydrocarbons, Equipment, Inventory or
Mineral Properties.




“Inventory”
means all “inventory” (as defined in the UCC) now owned or hereafter acquired by
the Mortgagor which are now or hereafter produced from or allocable to the
Mineral Properties or located on or used or held for use in connection with the
Mineral Properties or in connection with the operation thereof or the treating,
handling, storing, transporting, processing or marketing of
Hydrocarbons.














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“Investment
Property” means all “investment property” (as defined in the UCC) now owned or
hereafter acquired by the Mortgagor, arising from or pertaining to any Mineral
Properties or the operation thereof or the transporting or marketing of
Hydrocarbons.




“Lien”
means any interest in property securing an obligation owed to, or a claim by, a
Person other than the owner of the property, whether such interest is based on
jurisprudence, statute or contract, and including but not limited to the lien or
security interest arising from a mortgage, encumbrance, pledge, security
agreement, conditional sale or trust receipt or a lease, consignment or bailment
for security purposes. The term “Lien” shall include reservations, exceptions,
encroachments, easements, servitudes, usufructs, rights-of-way, covenants,
conditions, restrictions, leases and other title exceptions and encumbrances
affecting property. For the purposes of this Mortgage, the Mortgagor shall be
deemed to be the owner of any property which it has accrued or holds subject to
a conditional sale agreement, financing lease or other arrangement pursuant to
which title to the property has been retained by or vested in some other Person
for security purposes.




“Mineral
Properties” means collectively:




(a)
the oil, gas and mineral leases, mineral servitudes, subleases, farmouts,
royalties, operating rights, area of mutual interest rights, and/or other
mineral properties and/or mineral rights and assignments of such mineral rights
which are described in Exhibit A, attached hereto and made a part
hereof;




(b)
without limitation ofthe foregoing, all other right, title and interest of
Mortgagor, of whatever kind or character (whether now owned or hereafter
acquired by operation of law or otherwise) in and to (i) the oil, gas and/or
mineral leases or other agreements described in Exhibit A hereto, (ii) the lands
described or referred to in Exhibit A (or described in any of the instruments
described or referred to in Exhibit A), without regard to any limitations as to
specific undivided interests, lands or depths that may be set forth in Exhibit A
hereto or in any of the leases or other agreements described in Exhibit A
hereto;




(c)
all of Mortgagor’s right, title and interest (whether now owned or hereafter
acquired by operation of law or otherwise) in and to all presently existing and
hereafter created oil, gas and/or














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mineral
unitization, pooling and/or communitization agreements, declarations and/or
orders, and in and to the properties, rights and interests covered and the units
created thereby (including, without limitation, units formed under orders,
rules, regulations or other official acts of any federal, state or other
authority having jurisdiction), which cover, affect or otherwise relate to the
properties, rights and interests described in clause (a) above and described on
Exhibit A;




(d)
all of Mortgagor’s right, title and interest (whether now owned or hereafter
acquired by operation of law or otherwise) in and to all easements, servitudes,
rights-of-way, surface leases, licenses, permits and other surface or subsurface
rights, which are now or hereafter used, or held for use, in connection with the
properties, rights and interests described in clause (a), (b) or (c) above, or
in connection with the operation of such properties, rights and interests, or in
connection with the treating, handling, storing, processing, transporting or
marketing of oil, gas, other hydrocarbons, or other minerals produced from (or
allocated to) such properties, rights and interests described on Exhibit
A;




(e)
all rights, estates, powers and privileges appurtenant to the foregoing rights,
interests and properties; and




(f)
all extensions, renewals and corrections of any of the foregoing.




“Mortgage”
means this Mortgage, Collateral Assignment, Security Agreement and Financing
Statement, as amended or supplemented from time to time.




“Mortgaged
Property” has the meaning set forth in Section 2.1 (“Hypothecation”) of this
Mortgage.




“Note”
shall mean the promissory note in the principal amount of $4,800,000.00 made and
subscribed by the Borrower to the order of the Lender, together with any renewal
or refinancing note or notes delivered in substitution therefor or other
amendments, supplements, renewals or restatements thereto.




“Other
Proceeds” has the meaning set forth in Section 2.3 (“Assignment”) of this
Mortgage.




“Person”
means any individual, corporation, partnership, joint venture, association,
joint stock company, limited liability

 































 



company,
trust, unincorporated organization, government or any agency or political
subdivision thereof, or any other form of entity.




“Proceeds”
means all “proceeds” (as defined in the UCC), including without limitation cash
and non-cash proceeds of, and all other profits, rentals or receipts, in
whatever form, arising from the collection, sale, lease, exchange, assignment,
licensing or other disposition of, or realization upon, Collateral, including
without limitation all claims ofthe Mortgagor against third parties for loss of,
damage to or destruction of, or for proceeds payable under, or unearned premiums
with respect to, policies of insurance in respect of, any Collateral, and any
condemnation or requisition payments with respect to any Collateral, and
including proceeds of all such proceeds, in each case whether now existing or
hereafter arising.




“Proceeds
of Runs” has the meaning set forth in Section 2.3 (“Assignment”) of this
Mortgage.




“Production
Proceeds” has the meaning set forth in Section 2.3 (“Assignment”) of this
Mortgage.




“Security
Interests” means the security interests in the Collateral granted hereunder
securing the Indebtedness.




“UCC”
means the Uniform Commercial Code, Commercial Laws. Secured
Transactions (Louisiana Revised Statutes 10:9-101 through 9-710) in the State of
Louisiana, as amended from time to time; provided that if by reason of mandatory
provisions of law, the perfection or the effect of perfection or non-perfection
of the Security Interests in any Collateral is governed by the Uniform
Commercial Code as in effect in a jurisdiction other than Louisiana, “UCC” means
the Uniform Commercial Code as in effect in such other jurisdiction for purposes
of the provisions hereof relating to such perfection or effect of perfection or
non-perfection.




ARTICLE
2




LIENS
AND SECURITY INTERESTS




Section
2.1 Hypothecation. (a) In order to secure the full and punctual payment and
performance of all present and future Indebtedness, the Mortgagor does by these
presents specially mortgage, affect, hypothecate, pledge and assign unto and in
favor of the Lender, to inure to the use and benefit ofthe Lender, all of
Mortgagor’s right, title and interest in and to the following described
property, to-wit:















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(1)
The Mineral Properties, together with all rents, issues, profits, products and
proceeds, whether now or hereafter existing or arising, from the Mineral
Properties.




(2)
The Mortgagor’s rights in the improvements and other constructions now or
hereafter located on the Mineral Properties, including without limitation the
Equipment, to the extent (i) any such property should constitute or be deemed to
constitute immovable property for the purposes of Louisiana law, including
without limitation any buildings, platforms, structures, towers, rigs or other
immovable property or component parts thereof, or (ii) any such property is
otherwise susceptible of mortgage pursuant to Louisiana Civil Code Article 3286
or Louisiana Mineral Code Article 203.




The
descriptions of the Mineral Properties contained in Exhibit A are amplified by
the explanations contained in Exhibit 1 attached hereto and made a part
hereof.




All
of the foregoing property and rights covered by and subject to this Mortgage are
herein collectively referred to as the “Mortgaged Property.”




SUBJECT,
however, the condition that the Lender shall not be liable in any respect for
the performance of any covenant or obligation of the Mortgagor in respect of the
Mortgaged Property.




The
Mortgaged Property is to remain so specially mortgaged, affected and
hypothecated unto and in favor of Lender until the full and final payment or
discharge of the Indebtedness, and Mortgagor is herein and hereby bound and
obligated not to sell or alienate the Mortgaged Property to the prejudice of
this act.




(b)
In the event that the Mortgagor acquires (by operation of law or otherwise)
additional undivided interests in some or all of the Mineral Properties, this
Mortgage shall automatically encumber such additions or increases to the
Mortgagor’s interest in the Mineral Properties without need of further act or
document. Further, in the event the Mortgagor becomes the owner of an interest
in any part of the land described either in Exhibit A or in the documents
described in Exhibit A or otherwise subject to or covered by the Mineral
Properties, this Mortgage shall automatically encumber such ownership interest
of the Mortgagor without need of further act or document.




Section
2.2 The Security Interests. In order to secure the full and punctual payment and
performance of all present and future Indebtedness, the Mortgagor hereby grants
to the Lender a continuing security interest in and to all right, title and
interest of the Mortgagor in, to and under the following property, whether now
owned or existing or hereafter acquired or arising and regardless of where
located:

 












 
















(1)
the Mineral Properties;




(2)
the Accounts;




(3)
the Hydrocarbons, together with all liens and security interests securing
payment of the proceeds of the Hydrocarbons, including, but not limited to,
those liens and security interests provided for under (i) statutes, rules,
orders or regulations enacted in the jurisdictions in which the Mortgaged
Properties are located, or (ii) statutes, rules, orders or regulations made
applicable to the Mortgaged Properties under federal law (or some combination of
federal and state law);




(4)
the Equipment;




(5)
the General Intangibles (including the Contracts);




(6)
the Collateral Account, all cash deposited therein from time to time, and other
monies and property of any kind of the Mortgagor in the possession or under the
control ofthe Lender;




(7)
the Instruments;




(8)
the Inventory;




(9)
the Investment Property;




(10)
all engineering, seismic, reserve, production, accounting, title and legal data,
reports and information and all books and records in any form (including,
without limitation, customer lists, credit files, computer programs, tapes,
disks, punch cards, data processing software, transaction files, master files,
printouts and other computer materials and records) of the Mortgagor pertaining
to any of the Mineral Properties or Collateral; and




(11)
all Proceeds and products of all or any of the Collateral described in clauses 1
through 10 hereof.





The
term “Collateral” means each and all of the items and property rights described
in clauses 1-11 above, together with the Mortgaged Property and the Proceeds Of
Runs.




Section
2.3 Assignment. (a) To further secure the full and punctual payment and
performance of all present and future Indebtedness, up to the maximum amount
outstanding at any time and from time to time set forth in Section 2.5 (“Maximum
Amount”) below, the














10
















Mortgagor
does hereby absolutely, irrevocably and unconditionally pledge, pawn, assign,
transfer and assign to the Lender:




(i)
all Hydrocarbons and all monies which accrue to the Mortgagor’s interest in the
Mineral Properties (regardless of whether such monies accrued, and/or the events
which give rise to such accrual occurred, on or before or after the date hereof)
and all present and future rents therefrom (which rents include without
limitation all royalties, delay rentals, shut-in payments and other payments
which are rentals under Title 31 of the Louisiana Revised Statutes) and all
proceeds of the Hydrocarbons (which proceeds include without limitation all
payments for Hydrocarbons not yet delivered, such as those received pursuant to
“take or pay” arrangements) and of the products obtained, produced or processed
from or attributable to the Mineral Properties now or hereafter (herein
collectively referred to as the “Production Proceeds”) and




(ii)
all other monies which accrue to Mortgagor’s interest in the Mineral Properties,
and all present and future rents therefrom, which rents include, without
limitation, all royalties, delay rentals, shut-in payments and similar payments
(herein collectively called the “Other Proceeds”).




The
Mortgagor hereby authorizes and directs all purchasers of any Hydrocarbons and
all other obligors of Production Proceeds and Other Proceeds (herein
collectively called “Proceeds of Runs”) to pay and deliver to Lender, upon
request therefor by Lender, all of the Proceeds of Runs accruing to the
Mortgagor’s interest without further inquiry as to the rights ofthe Lender to
receive the same. The Mortgagor agrees that such obligors shall have no
responsibility to see to the application of any funds so paid to
Lender.




(b)
Mortgagor constitutes and appoints Lender as Mortgagor’s special
attorney-in-fact (with full power of substitution, either generally or for such
periods or purposes as Lender may from time to time prescribe) in the name,
place and stead of Mortgagor to do any and every act and exercise any and every
power that Mortgagor might or could do or exercise personally with respect to
all Hydrocarbons and Proceeds of Runs (the same having been assigned by
Mortgagor to Lender pursuant to Section 2.3(a) hereof), expressly inclusive, but
not limited to, the right, power and authority to:




(1)
execute and deliver in the name of Mortgagor any and all transfer orders,
division orders, letters in lieu of transfer orders, indemnifications,
certificates and other instruments of every nature that may be requested or
required by any purchaser of Hydrocarbons from any of the Mortgaged Properties
for the purposes of effectuating payment of the Production Proceeds to Lender or
which Lender may otherwise deem necessary or appropriate to effect the intent
and purposes ofthe assignment contained in Section 2.3(a); and




(2)
if under any product sales agreements other than division orders or transfer
orders, any Production Proceeds are required to be paid by the purchaser to
Mortgagor so that under such existing agreements payment cannot be made of such
Production Proceeds to




 












 

















Lender,
to make, execute and enter into such sales agreements or other agreements as are
necessary to direct Production Proceeds to be payable to Lender;




giving
and granting unto said attorney-in-fact full power and authority to do and
perform any and every act and thing whatsoever necessary and requisite to be
done as fully and to all intents and purposes, as Mortgagor might or could do if
personally present. Mortgagor shall be bound thereby as fully and effectively as
if Mortgagor had personally executed, acknowledged and delivered any of the
foregoing certificates or documents. The powers and authorities herein conferred
upon Lender may be exercised by Lender through any person who, at the time of
the execution of the particular instrument, is an officer of Lender. The power
of attorney herein conferred is granted for valuable consideration and hence is
coupled with an interest and is irrevocable so long as the Indebtedness, or any
part thereof, shall remain unpaid. All persons dealing with Lender or any
substitute shall be fully protected in treating the powers and authorities
conferred by this paragraph as continuing in full force and effect until advised
by Lender that all the Indebtedness is fully and finally paid. Lender may, but
shall not be obligated to, take such action as it deems appropriate in an effort
to collect the Production Proceeds and any reasonable expenses (including
reasonable attorney’s fees) so incurred by Lender shall be a demand obligation
of Mortgagor (which obligation the Mortgagor expressly promises to pay) owing by
the Mortgagor to Lender and shall bear interest, from the date expended until
paid, at the rate described in Section 4.8 (“Advances by Lender”)
hereof.




(c)
Anything contained in this Section 2.3 above notwithstanding, so long as
Mortgagor is not in Default, Lender shall have no right to collect and receive
any Proceeds of Revenue from any obligator or purchaser.




Section
2.4 Condemnation. The Mortgagor hereby assigns to the Lender any and all awards
that may be given or made in any proceedings by any legally constituted
authority to condemn or expropriate the Collateral, or any part thereof, under
power of eminent domain, and if there is such a condemnation or expropriation
and Mortgagor is in Default, the Lender may, at its election, either pay the net
proceeds thereof toward the payment ofthe Indebtedness or pay the net proceeds
thereof to the Mortgagor, provided, that so long as Mortgagor is not in Default,
Lender shall have no right to the proceeds of any condemnation or
expropriation.




Section
2.5 Maximum Amount. (a) The maximum amount of the Indebtedness that may be
outstanding at any time and from time to time that this Mortgage secures,
including without limitation as a mortgage and as a collateral assignment, and
including any Advances made and included within the Indebtedness, is twenty
million ($20,000,000.00) dollars.




(b)
The Mortgagor acknowledges that this Mortgage secures all Indebtedness under or
pursuant to the Loan Agreement, the Note, this Mortgage or the other Collateral
Documents, whether such loans or advances made or incurred by the Lender are
optional or obligatory by the Lender. This Mortgage is and shall remain
effective, even though the amount of the Indebtedness may now be zero or may
later be reduced to zero, until all of the amounts,

 











12
















liabilities
and obligations, present and future, comprising the Indebtedness have been
incurred and are extinguished. When no Indebtedness secured by this Mortgage
exists and the Lender is not bound to permit any Indebtedness to be incurred,
this Mortgage may be terminated by the Mortgagor upon thirty (30) days prior
written notice sent by the Mortgagor to the Lender in accordance with the
provisions of this Mortgage, and Lender shall provide Mortgagor with written,
recordable, evidence of termination within said thirty (30) day
period.




Section
2.6 Delivery of Transfer Orders. Independent of the other provisions and
authorities herein granted, the Mortgagor agrees to execute and deliver any and
all transfer orders, letters in lieu thereof division orders and other
instruments that may be requested by Lender or that may be required by any
purchaser of any Hydrocarbons for the purpose of effectuating payment of the
Proceeds of Runs to Lender to the extent that said Proceeds are payable to
Lender under the terms of this Mortgage. If under any existing sales agreements,
other than division orders or transfer orders, any Proceeds of Runs are required
to be paid by the purchaser to the Mortgagor so that under such existing
agreements payment cannot be made of such Proceeds of Runs to Lender, the
Mortgagor’s interest in all Proceeds of Runs under such sales agreements and in
all other Proceeds of Runs which for any reason may be paid to the Mortgagor
shall, when received by the Mortgagor, constitute trust funds in the Mortgagor’s
hands and shall be immediately paid over to Lender.




Section
2.7 Change of Purchaser. If Lender is entitled to Proceeds of Runs under terms
of this Mortgage, should any Person now or hereafter purchasing or taking
Hydrocarbons fail to make payment to Lender of the Proceeds of Runs within 30
days of when due, Lender shall have the right to make, or to require the
Mortgagor to make, a change of connection and the right to designate or approve
the purchaser with whose facilities a new connection shall be made, and Lender
shall have no liability or responsibility in connection therewith so long as
ordinary care is used in making such designation.




Section
2.8 Payment of Proceeds. Until such time as Lender is entitled to receive
Proceeds of Runs under the terms of this Mortgage, the purchasers or other
Persons obligated to make such payment shall continue to make payment to the
Mortgagor. Should Lender become entitled to receive payment of the Proceeds of
Runs, Lender shall make written demand upon said Purchaser that payment be made
direct to the Lender. Said written demand shall recite that Mortgagor is in
Default. Any failure to notify such purchasers or other Persons shall not in any
way waive, remit or release the right of the Lender to receive any payments not
theretofore paid over to the Mortgagor before the giving of written notice. In
this regard, in the event payments are made direct to the Lender, and then, at
the request of the Lender payments are, for a period or periods of time, paid to
the Mortgagor, the Lender shall nevertheless have the right, effective upon
written notice, to require future payments be again made to it.




Section
2.9 Limitation of Liability. The Lender and its successors and assigns are
hereby absolved from all liability for failure to enforce collection of the
Proceeds of Runs and from all other responsibility in connection therewith,
except the responsibility of each to account (by application upon the
Indebtedness or otherwise) to the Mortgagor for funds actually

 











13
















received.
The Mortgagor agrees to indemnify and hold harmless Lender against any and all
liabilities, actions, claims, judgments, costs, charges and attorneys’ fees by
reason of the assertion that such parties received, either before or after
payment and performance in full of the Indebtedness, funds from the production
of Hydrocarbons or the Proceeds of Runs claimed by third persons (and/or funds
attributable to sales of production which (i) were made at prices in excess of
the maximum price permitted by or (ii) were otherwise made in violation of laws,
rules, regulations and/or orders governing such sales), and the Lender shall
have the right to defend against any such claims or actions, employing attorneys
of Lender’s own selection and if not furnished with indemnity satisfactory to
them, the Lender shall have the right to compromise and adjust any such claims,
actions and judgments, and in addition to the rights to be indemnified as herein
provided, all amounts paid by the Lender in compromise, satisfaction or
discharge of any such claims, actions or judgments, and all court costs,
attorneys’ fees and other expenses of every character expended by the Lender
pursuant to the provisions of this Section shall be a demand obligation (which
obligation the Mortgagor hereby expressly promises to pay) owing by the
Mortgagor to such parties and shall bear interest, from the date expended until
paid, at the rate described in Section 4.8 (“Advances by Lender”) hereof.
WITHOUT LIMITATION, IT IS THE INTENTION OF MORTGAGOR AND MORTGAGOR AGREES THAT
THE FOREGOING RELEASES AND INDEMNITIES SHALL APPLY TO EACH INDEMNIFIED PARTY
WITH RESPECT TO ALL CLAIMS, DEMANDS, LIABILITIES, LOSSES, DAMAGES (INCLUDING
WITHOUT LIMITATION CONSEQUENTIAL DAMAGES, CAUSES OF ACTION, JUDGMENTS,
PENALTIES, COSTS AND EXPENSES AND FURTHER INCLUDING WITHOUT LIMITATION
REASONABLE ATTORNEYS’ FEES AND EXPENSES, WHICH IN WHOLE OR IN PART ARE CAUSED BY
OR ARISE OUT OF STRICT LIABILITY OR OUT OF THE NEGLIGENCE OF SUCH (AND/OR ANY
OTHER) INDEMNIFIED PARTY. However, such indemnities and releases shall not apply
to any particular indemnified party (but shall apply to the other indemnified
parties) to the extent the subject of the indemnification is caused by or arises
out of the gross negligence or willful misconduct of such particular indemnified
party.




Section
2.10 Duty to Perform. Nothing herein contained shall detract from or limit the
obligation of the Mortgagor to make prompt payment of the Indebtedness at the
time and in the manner provided herein and in the Loan Agreement, regardless of
whether the Proceeds of Runs herein assigned are sufficient to pay same. The
Mortgagor will do and perform every act required of it by this Mortgage at the
time or times and in the manner specified.




Section
2.11 Limitation of Liability. The foregoing mortgage Liens and 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
Mortgagor with respect to any of the Collateral or any transaction in connection
therewith.




ARTICLE
3




REPRESENTATIONS
AND WARRANTIES














14
















The
Mortgagor represents and warrants to the Lender that:




Section
3.1 Title. The Collateral (including without limitation the Mineral Properties)
is accurately, completely, adequately and sufficiently described herein and in
Exhibit A as required by all applicable laws for this Mortgage to create a Lien
on all of the Collateral. The execution, delivery and performance of this
Mortgage and the creation of the liens hereunder do not violate any provision of
or constitute a default under any operating agreement or other instrument
affecting or comprising any of the Collateral or to which the Mortgagor is a
party. The Mortgagor represents and warrants to the Lender that (a) the Mineral
Properties described in Exhibit A hereto are valid, subsisting leases and
contracts, in full force and effect, (b) all producing wells located on the
lands described in Exhibit A have been drilled, operated and produced in
conformity with all applicable laws, rules and regulations of all regulatory
authorities having jurisdiction, and are subject to no penalties on account of
past production, and that such wells are in fact bottomed under and are
producing from, and the well bores are wholly within, lands described in Exhibit
A (or in the case of wells located on properties unitized therewith, such
unitized properties), (c) the Mortgagor, to the extent of the interest specified
in Exhibit A, has legal, valid and defensible title to each property right or
interest constituting the Mineral Properties, subject to exceptions permitted by
Section 6.2 of the Loan Agreement, and the respective operating interests and
net revenue interests of the Mortgagor in and to the Hydrocarbons as set forth
on Exhibit A hereto, and the Mortgagor’s percentage interests in the Mineral
Properties, cash flow, net income and other distributions and in the cost of
exploration, development and production, all as set forth in Exhibit A hereto,
are true and correct in all material respects and accurately reflect the
respective interests to which the Mortgagor is legally obligated or entitled,
(d) the Mortgagor is not obligated, by virtue of any prepayment under any
contract providing for the sale by the Mortgagor of Hydrocarbons which contains
a “take or pay” clause or under any similar arrangement, to deliver Hydrocarbons
at some future time without then or thereafter receiving full payment therefor,
and (e) no agreement, contract or instrument set forth in Exhibit A or Exhibit B
contains any provision which would prevent the practical realization of the
benefits of this Mortgage as to the Collateral. With respect to all wells
existing on the date hereof, such shares of production and expenses are not
subject to change (pursuant to non-consent provisions of operating agreements
described in Exhibit A or Exhibit B or otherwise) except, and only to the extent
that, such changes are expressly described in Exhibit A. The Mortgagor will
warrant and forever defend the Collateral unto the Lender against every person
whomsoever lawfully claiming the same or any part thereof except persons
claiming under encumbrances of record permitted by Section 6.2 of the Loan
Agreement, and will maintain and preserve the Lien hereby created so long as any
of the Indebtedness remains unpaid.




Section
3.2 Rents, Royalties. All rents, royalties and other payments (except for those
which are being contested in good faith and by appropriate proceedings and for
which the Mortgagor has established adequate reserves and so long as the payment
of same is not a condition to be met in order to maintain an oil, gas and/or
other mineral lease or other agreement in force) due and payable under the
Mineral Properties which are productive of oil and/or gas (or are included in
units productive of oil and/or gas) and all other oil, gas and/or mineral
leases,














15
















contracts
and other agreements forming a part of the Mortgaged Property, have been and are
being properly and timely paid, and the Mortgagor is not in default with respect
to any obligations (and the Mortgagor is not aware of any default by any third
party with respect to such third party’s obligations) under such leases,
contracts and other agreements, or otherwise attendant to the ownership or
operation of the Collateral, where such default could adversely affect the
ownership or operation of the Collateral to which such obligations relate. The
Mortgagor is not currently accounting (and does not anticipate accounting) for
any royalties, or overriding royalties or other payments out of production, on a
basis (other than delivery in kind) where such payments are based other than on
proceeds received by Mortgagor from sale; the Mortgagor has advised the Lender
in writing of situations, if any, where a contingent liability to so account may
exist.




Section
3.3 No Limitations on Payments for Production. Except as otherwise specifically
disclosed to the Lender in writing with respect to any particular part of the
Mineral Properties, (i) neither Mortgagor, nor its predecessors in title, have
received prepayments (including, but not limited to, payments for gas not taken
pursuant to “take or pay” arrangements) for any Hydrocarbons produced or to be
produced from the Mineral Properties after the date hereof; (ii) none of the
Mineral Properties is subject to any contractual or other arrangement whereby
payment for production is to be deferred for a substantial period after the
month in which such production is delivered (i.e., in the case of oil not in
excess of sixty (60) days, and in the case of gas not in excess of ninety (90)
days); (iii) none of the Mineral Properties is subject to any contractual, or
other, arrangement for the sale of crude oil which cannot be cancelled on ninety
(90) days (or less) notice, and none of the Mineral Properties is subject to a
gas sales contract which contains terms which are not customary in the industry;
(iv) none of the Mineral Properties is subject at the present time to any
regulatory refund obligation and, to the best of Mortgagor’s knowledge, no facts
exist which might cause the same to be imposed; (v) none of the Mineral
Properties is subject to an arrangement or agreement under which any purchaser
or other Person is entitled to “make-up” or otherwise receive deliveries of
Hydrocarbons at any time after the date hereof without paying at such time the
full contract price therefor; and (vi) no Person is entitled to receive any
portion of the interest of the Mortgagor in any Hydrocarbons or to receive cash
or other payments from the Mortgagor to “balance” any disproportionate
allocation of Hydrocarbons under any operating agreement, gas balancing and
storage agreement, gas processing or dehydration agreement, or other similar
agreements.




Section
3.4 Pricing. The prices being received for the production of Hydrocarbons do not
violate any Contract, law or regulation. Where applicable, all of the wells
located
on the Mineral Properties and production of Hydrocarbons therefrom have been
properly classified under appropriate governmental regulations.




Section
3.5
Consents
and Preferential Rights. There are no preferential purchase rights held by third
parties affecting any part of the Collateral, or rights of third parties to
prohibit the pledge or mortgage to Lender of any part of the Collateral without
the consent of such third parties.


















 

















Section
3.6 No Inconsistent Agreements. The Mortgagor has not performed any acts or
signed any agreements which might prevent the Lender from enforcing any of the
terms of this Mortgage or which would limit the Lender in any such
enforcement.




Section
3.7 Status of Contracts. All material Contracts in effect on the date hereof are
specifically listed or Exhibit A or Exhibit B hereof. All of the Contracts and
obligations of the Mortgagor that relate to the Mineral Properties (i) are in
full force and effect and constitute legal, valid and binding obligations of the
Mortgagor, and (ii) neither the Mortgagor nor, to the knowledge of the
Mortgagor, any other party to the Contracts (a) is in breach of or default, or
with the lapse of time or the giving of notice, or both, would be in breach or
default, with respect to any of its obligations thereunder or (b) has given or
threatened to give notice of any default under or inquiry into any possible
default under, or action to alter, terminate, rescind or procure a judicial
reformation of any Contract.




Section
3.8 Accounts. The Accounts represent bona fide obligations of the respective
account debtors, which obligations are free and clear of any set off,
compensation, counterclaim, defense, allowance or adjustment other than
discounts for prompt payment shown on the invoice, and arose in the ordinary
course of the Mortgagor’s business.




Section
3.9 Status of Equipment. To the best of the Mortgagor’s knowledge, the
Equipment, fixtures and other tangible personal property forming a part of the
Collateral are in good repair and condition and are adequate for the normal
operation of the Collateral in accordance with prudent industry standards; all
of such Collateral is located on the Mineral Properties, except for that portion
thereof which is located elsewhere (including that usually located on the
Mineral Properties but now temporarily located elsewhere) in the course of the
normal operation of the Mineral Properties.




Section
3.10 UCC Information. The chief executive office of the Mortgagor has been
continuously located within the State of Texas from and after its formation.
Mortgagor was formed as a legal entity after July 1, 2001. The exact name of the
Mortgagor is set forth on the cover page of this Mortgage.




ARTICLE
4




COVENANTS




Section
4.1 Insurance and Notice. The Mortgagor will procure and maintain for the
benefit of the Lender original paid-up insurance policies against such
liabilities, casualties, risks and contingencies, in such amounts and form and
substance, with such financially sound and reputable companies, and with such
expiration dates, as are acceptable to the Lender, and containing a
non-contributory standard mortgagee clause or its equivalent in favor of the
Lender. The Mortgagor will at all times maintain costs of regaining control of
well insurance or similar insurance to the extent customary in the industry in
the pertinent area of operations. Each policy shall contain an agreement by the
insurer not to cancel or amend the policy without giving the Lender at least
thirty (30) days prior written notice of its intention to do 

 











17
















so.
Upon request of the Lender, the Mortgagor will furnish or cause to be furnished
to the Lender from time to time a summary of the insurance coverage of the
Mortgagor in form and substance satisfactory to the Lender and if requested will
furnish the Lender original certificates of insurance and/or copies of the
applicable policies and all renewals thereof. In the event the Mortgagor should,
for any reason whatsoever, fail to keep the corporeal (tangible) Collateral or
any part thereof so insured, or to keep said policies so payable, or fail to
deliver to the Lender the original or certified policies of insurance and the
renewals therefor upon demand, then the Lender, if it so elects, may itself have
such insurance effected in such amounts and with such companies as it may deem
proper and may pay the premiums therefor (as an Advance as defined hereinbelow).
The Mortgagor will notify the Lender immediately in writing of any material
blowout, fire or other casualty to or accident involving the Mortgaged Property,
the Equipment or the Hydrocarbons, whether or not such blowout, fire, casualty
or accident is covered by insurance. The Mortgagor will promptly further notify
the Mortgagor’s insurance company and to submit an appropriate claim and proof
of claim to the insurance company if such a casualty or accident occurs. In the
event of any loss on any of such policies while Mortgagor is in Default, the
Lender may, at its election, either apply the net proceeds thereof toward the
payment of the Indebtedness or pay the net proceeds thereof to the Mortgagor,
either wholly or in part, and under such conditions as the Lender may determine
to enable the Mortgagor to repair or restore the Collateral. So long as
Mortgagor is not in Default, the net proceeds of any loss on any insurance
policy shall be paid to Mortgagor to repair or restore the collateral or to pay
the Indebtedness at Mortgagor’s election.




Section
4.2 Operation of the Mortgaged Property. Whether or not the Mortgagor is the
operator of the Mortgaged Property, the Mortgagor will, at the Mortgagor’s own
expense, (a) do all things necessary to keep unimpaired the Mortgagor’s rights
in the Mortgaged Property (subject to any permitted abandonment provisions
hereinbelow), (b) cause the lands described in Exhibit A to be maintained,
developed, protected against drainage, and continuously operated for the
production of hydrocarbons in a good and workmanlike manner as would a prudent
operator, and in accordance with generally accepted practices in the field where
the Mortgaged Properties are located and applicable operating agreements, and
(c) cause to be paid, promptly as and when due and payable, all rentals and
royalties payable in respect of the Mortgaged Property, and all expenses
incurred in or arising from the operation or development of the Mortgaged
Property. The Mortgagor will observe and comply with all terms and provisions,
express or implied, of the Mineral Properties, and all agreements and contracts
of any type relating to the Mortgaged Property, in order to keep the same in
full force and effect, including, without limitation, maintenance of productive
capacity of each well or unit comprising the Mortgaged Property, and will not,
without the prior written consent of the Lender, surrender, abandon or release
(or otherwise reduce its rights under) any such lease, in whole or in part, so
long as any well situated thereon (whether or not such well is located on the
Mineral Properties), or located on any unit containing all or any part of such
leases, is capable (or is subject to being made capable through drilling,
reworking or other operations which it would be economically feasible to
conduct) of producing hydrocarbons in commercial quantities (as determined
without considering the effect of this Mortgage but considering the cost of such
drilling, reworking and other operations); provided, however, that the Mortgagor
may, to the extent expressly required











18



















by
the terms of any such lease under a “Pugh clause” or similar provision, or to
the extent otherwise required by law, confirm to the lessor thereof that the
lease has by its terms terminated as to any specified portion thereof on which
no such well exists. Without the express prior written consent of the Lender,
Mortgagor will not abandon or consent to the abandonment of any well producing
from the Mortgaged Property (or properties unitized therewith) so long as such
well is capable (or is subject to being made capable through drilling, reworking
or other operations which it would be commercially feasible to conduct) of
producing hydrocarbons in commercial quantities (as determined without
considering the effect of this Mortgage but considering the cost of such
drilling, reworking and other operations). The Mortgagor will not without the
express prior written consent of the Lender elect not to participate in a
proposed operation on the Mortgaged Property where the effects of such election
would be the forfeiture either temporarily (i.e., until a certain sum of money
is received out of the forfeited interest) or permanently of any interest in the
Mortgaged Property.




Section
4.3 Pooling and Unitization. The Mortgagor has the right, and is hereby
authorized, to pooi or unitize all or any part of any tract of land described in
Exhibit A, insofar as relates to the Mortgaged Property, with adjacent lands,
leaseholds and other interests, when, in the reasonable judgment of the
Mortgagor, it is necessary or advisable to do so in order to form a drilling
unit to facilitate the orderly development of that part of the Mortgaged
Property affected thereby, or to comply with the requirements of any law or
governmental order or regulation relating to the spacing of wells or proration
of the production therefrom; provided, however, that the Hydrocarbons produced
from any unit so formed shall be allocated among the separately owned tracts or
interests comprising the unit in proportion to the respective surface areas
thereof; and provided further that the Mortgagor is not be entitled to form any
such unit without the written consent of the Lender (which consent shall not be
unreasonably withheld) if the effect of such formation would be to decrease the
amount of Hydrocarbons which would be subject to this Mortgage. Any unit so
formed may relate to one or more zones or horizons, and a unit formed for a
particular zone or horizon need not conform in area to any other unit relating
to a different zone or horizon, and a unit formed for the production of oil need
not conform in area with any unit formed for the production of gas. Immediately
after formation of any such unit, the Mortgagor shall furnish to the Lender a
true copy of the pooling agreement, declaration of pooling or other instrument
creating such unit, in such number of counterparts as the Lender may reasonably
request. The interest in any such unit attributable to the Mortgaged Property
(or any part thereof) included therein shall become a part of the Mortgaged
Property and shall be subject to the Lien hereof in the same manner and with the
same effect as though such unit and the interest of the Mortgagor therein were
specifically described in Exhibit A. The Mortgagor may enter into pooling or
unitization agreements not hereinabove authorized only with the prior written
consent of the Lender.




Section
4.4 Contracts. The Mortgagor will not enter into any operating agreement or
other Contract which materially adversely affects the Collateral or the Mineral
Properties, or which is not in the ordinary course of business. The Mortgagor
will promptly take all action necessary to enforce or secure the observance or
performance of any term, covenant, agreement or condition to be observed or
performed by third parties under any Contract, or any












19
















part
thereof, or to exercise any of its rights, remedies, powers and privileges under
any Contract, all in accordance with the respective terms thereof The Mortgagor
will not do or permit anything to be done to the Collateral that may violate the
terms of any insurance covering the Collateral or any part thereof




Section
4.5
Filing.
The Mortgagor agrees that a carbon, photographic, facsimile, photostatic or
other reproduction of this Mortgage or of a financing statement is sufficient as
a financing statement. This Mortgage may be effective as a financing statement
filed as a fixture filing with respect to all fixtures included within the
Collateral, and shall also be effective as the financing statement covering as
extracted collateral and minerals or the like (including oil and gas) and other
substances of value that may be extracted or severed from the earth and accounts
related thereto. The mailing address of the Mortgagor and the address of the
Lender from which information concerning the Security Interests evidenced
hereunder may be obtained are the respective addresses of the Mortgagor and the
Lender set forth in Article 6. The Mortgagor shall pay all costs of or
incidental to the recording or filing this Mortgage and of any financing,
amendment, continuation, termination or other statements concerning the
Collateral.




Section
4.6 Collateral Indemnity. If the validity or priority of this Mortgage or any
rights, security interests or other interests created or evidenced hereby shall
be attacked, endangered or questioned or if any legal proceedings are instituted
with respect thereto, the Mortgagor will give prompt written notice thereof to
the Lender and at the Mortgagor’s own cost and expense will take commercially
reasonable steps to cure any defect that may be developed or claimed, and to
defend such legal proceedings, and the Lender (whether or not named as a party
to legal proceedings with respect thereto) is hereby authorized and empowered to
take such additional steps as are commercially reasonable for the defense of any
such legal proceedings or the protection of the validity or priority of this
Mortgage and the rights, security interests and other interests created or
evidenced hereby, and all reasonable expenses so incurred shall be considered
Advances as provided in Section 4.8 (“Advances by Lender”) hereof, and shall be
a part of the Indebtedness.

 


Section
4.7 Taxation of Mortgage. In the event that any governmental authority shall
impose any taxation of mortgages or the indebtedness they secure, the Mortgagor
agrees to pay such governmental taxes, assessments or charges either to the
governmental authority or to the Lender, as provided by law.

 




Section
4.8 Advances by Lender. Should the Mortgagor fail to pay same within ten (10)
business days of written demand, the Mortgagor authorizes the Lender in the
Lender’s discretion to advance any sums necessary for the purpose of paying (i)
insurance premiums, (ii) taxes, forced contributions, service charges, local
assessments and governmental charges, (iii) any Liens or encumbrances affecting
the Collateral (whether superior or subordinate to the Lien of this Mortgage)
not permitted by this Mortgage or the Loan Agreement, (iv) necessary repairs and
maintenance expenses or (v) any other amounts which are covered by the Loan
Agreement or which the Lender deems necessary and appropriate to preserve the
validity and ranking of this Mortgage, to cure any Defaults or to prevent the
occurrence of any















 



















Default,
or otherwise authorized by this Mortgage (collectively, the “Advances”) of
whatever kind; provided, however, that nothing herein contained shall be
construed as making such Advances obligatory upon Lender, or as making Lender
liable for any loss, damage, or injury resulting from the nonpayment thereof The
Mortgagor covenants and agrees that within five (5) days after demand therefor
by the Lender, the Mortgagor will repay the Advances to the Lender, together
with interest thereon at the rate provided in the Loan Agreement and the Note
from the date incurred. All such Advances (and interest) shall be included in
the Indebtedness secured hereby, subject to the maximum amount of the
Indebtedness set forth above in Section 2.5
(“Maximum
Amount”).




ARTICLE
5




DEFAULT
AND REMEDIES




Section
5.1 Events of Default. Any of the following events shall be considered an “Event
of Default” as that term is used herein:




(a)
Principal and Interest Payments. The Borrower fails to make payment when due of
any principal or interest installment on the Note or any other Indebtedness to
the Lender.




(b)
Loan Agreement. The occurrence of an Event of Default as defined in the Loan
Agreement.




Section
5.2 Remedies. (a) Upon the occurrence of any Event of Default, the Lender may
take such action, without notice or demand, as it deems advisable to protect and
enforce its rights against the Mortgagor and in and to the Collateral,
including, but not limited to, the following actions, each of which may be
pursued concurrently or otherwise, at such time and in such order as the Lender
may determine, in its sole discretion, without impairing or otherwise affecting
the other rights and remedies of the Lender: (i) institute proceedings for the
complete foreclosure of this Mortgage in which case the Collateral or any part
thereof may be sold for cash or upon credit in one or more portions; or (ii) to
the extent permitted and pursuant to the procedures provided by applicable law,
institute proceedings for the partial foreclosure of this Mortgage for the
portion of the Indebtedness then due and payable, subject to the continuing Lien
of this Mortgage for the balance of the Indebtedness not then due; or (iii)
institute an action, suit or proceeding in equity for the specific performance
of any covenant, condition or agreement contained in this Mortgage or the Loan
Agreement; or (iv) recover judgment on the Note either before, during or after
any proceedings for the enforcement of this Mortgage; or (v) apply for the
appointment of a trustee, receiver, liquidator or conservator of the Collateral,
without regard for the adequacy of the security for the Indebtedness and without
regard for the solvency of the Mortgagor or of any person, firm or other entity
liable for the payment of the Indebtedness; or (vi) pursue such other remedies
as the Lender may have under applicable law.




(b)
The proceeds or avails of any sale made under or by virtue of this Section,
together with any other sums which then may be held by the Lender under this
Mortgage,
















 

















whether
under the provisions of this Section or otherwise, shall be applied to the
Indebtedness in such manner as the Lender, in its sole discretion, shall
determine.




(c)
Upon any sale made under or by virtue of this Section, the Lender may bid for
and acquire the Collateral or any part thereof and in lieu of paying cash
therefor may make settlement for the purchase price by crediting upon the
Indebtedness the net sales price after deducting therefrom the expenses of the
sale and the costs of the action and any other sums which the Lender is
authorized to deduct under this Mortgage.




Section
5.3 Collateral Account. Upon an Event of Default the Lender shall have the right
to require the Mortgagor to use a lockbox account (the “Collateral Account”) at
a bank selected by Lender. Upon an Event of Default the Collateral Account shall
be subject to access and withdrawal by the Lender only. Payments due and payable
on the Note may be debited from the Collateral Account. Upon an Event of Default
payments (in the form of checks, drafts, cash or otherwise) received by the
Mortgagor (and not paid directly to Lender) in satisfaction, in whole or in
part, of any Proceeds of Runs, Accounts or General Intangibles (or Proceeds
therefrom) of the Mortgagor shall be deposited by the Mortgagor in the
Collateral Account. The Mortgagor will deposit for credit to the Collateral
Account all such items of payment and remittances within two (2) business days
of the receipt thereof, and shall not commingle any such items of payment and
remittances with any of the Mortgagor’s other property. Funds in the Collateral
Account shall be subject to a security interest in favor of the Lender to secure
the Indebtedness, and the Lender may apply or cause to be applied (subject to
collection) any or all of the balance from time to time standing in the
Collateral Account against any amounts then due and payable under the
Indebtedness in such order as determined by the Lender.




Section
5.4 General Authority. The Mortgagor hereby irrevocably appoints the Lender its
agent and attorney in fact, with full power of substitution, in the name of the
Mortgagor or the Lender, for the sole use and benefit of the Lender, but at the
Mortgagor’s expense, to exercise, at any time and from time to time while an
Event of Default has occurred and is continuing, all or any of the following
powers with respect to all or any of the Collateral:




(i)
to endorse the name of the Mortgagor upon any check, draft or other instrument
payable to the Mortgagor evidencing payment upon any Accounts or General
Intangible,




(ii)
to notify postal service authorities to change the address for delivery of the
assigned payments of Collateral to a “lockbox” address designated and controlled
by the Lender, and to receive, open and dispose of assigned payments of
Collateral addressed to the Mortgagor,




(iii)
to demand, sue for, collect, receive and give acquittance for any and all
Accounts and other monies due or to become due for or as Collateral or by virtue
thereof, 

 































 




(iv)
to settle, compromise, compound, prosecute or defend any action or proceeding
with respect to any of the Collateral, and




(v)
to extend the time of payment of any or all of the Collateral and to make any
allowance and other adjustments with reference thereto.




The
aforesaid mandate and power of attorney, being coupled with an interest, is
irrevocable so long as any of the Indebtedness remain outstanding.




Section
5.5 Accounts and Contracts. While an Event of Default has occurred and is
continuing, (i) the Mortgagor will make no material change to the terms of any
Account or Contract without the prior written permission of the Lender, and (ii)
the Mortgagor upon request of the Lender will promptly notify (and the Mortgagor
hereby authorizes the Lender so to notify) each account debtor in respect of any
Account or General Intangible that such Collateral has been assigned to the
Lender hereunder, and that any payments due or to become due in respect of such
Collateral are to be made directly to the Lender or its designee.




Section
5.6 Sale. Upon the occurrence of an Event of Default, the Lender may exercise
all rights of a secured party under the UCC 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) withdraw all cash in the Collateral Account and apply such cash and other
cash, if any, then held by it as Collateral against the Indebtedness or (ii)
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
Mortgagor 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 Mortgagor which may be waived, and the
Mortgagor, to the extent permitted by law, hereby specifically waives all rights
of redemption, stay or appraisal which it has or may have under any law now
existing or hereafter adopted. The Mortgagor 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 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

 











23
















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.




Section
5.7 Set-Off. Upon the occurrence of any Event of Default, the Lender shall have
the right to set-off any funds of the Mortgagor in the possession of the Lender
against any amounts then due by the Mortgagor to the Lender pursuant to the
Mortgage.




Section
5.8 Confession of Judgment. For purposes of foreclosure under Louisiana
executory process procedures, the Mortgagor hereby acknowledges the Indebtedness
and confesses judgment in favor of Lender for the full amount of the
Indebtedness.




Section
5.9 Expenses. The Mortgagor will pay all reasonable expenses, including but not
limited to reasonable attorneys’ fees, incurred in connection with the full
protection and preservation of, and foreclosure, collection or other realization
of or on, the Collateral or this Mortgage, or in connection with the enforcement
of any of the Mortgagor’s obligations or the Lender’s rights and remedies set
forth herein, whether or not suit or any foreclosure proceedings are filed. All
insurance expenses and all expenses of protecting, storing, warehousing,
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 Mortgagor. All
such expenses shall be treated as Advances as provided in Section 4.8 (“Advances
by Lender”) hereof and thus included in the Indebtedness secured
hereby.




Section
5.10 Keeper. In the event the Collateral, or any part thereof, is seized as an
incident to an action for the recognition or enforcement of this Mortgage by
executory process, ordinary process, sequestration, writ of fieri facias or
otherwise, the Mortgagor and the Lender agree that the court issuing any such
order shall, if petitioned for by Lender, direct the applicable sheriff to
appoint as a keeper of the Collateral, the Lender or any agent designated by
Lender or any person named by the Lender at the time such seizure is effected.
This designation is pursuant to Louisiana Revised Statutes 9:5131 through 5135
and 9:5136 through 5140.2, as the same may be amended, and Lender shall be
entitled to all the rights and benefits afforded thereunder. It is hereby agreed
that the keeper shall be entitled to receive as compensation, in excess of its
reasonable costs and expenses incurred in the administration or preservation of
the Collateral, an amount equal to two percent of the gross revenues of the
Collateral, which shall be



















24
















included
as Indebtedness secured by this Mortgage. The designation of keeper made herein
shall not be deemed to require Lender to provoke the appointment of such a
keeper.




Section
5.11 Waivers. The Mortgagor waives in favor of the Lender any and all homestead
exemptions and other exemptions of seizure or otherwise to which Mortgagor is or
may be entitled under the constitution and statutes of the State of Louisiana
insofar as the Collateral is concerned. The Mortgagor further waives: (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.




Section
5.12 Authentic Evidence. Any and all declarations of facts 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 Mortgagor specifically
agrees that such an affidavit by a representative of the Lender as to the
existence, amount, terms and maturity of the Indebtedness and of a default
thereunder shall constitute authentic evidence of such facts for the purpose of
executory process.




Section
5.13 Assemble Collateral. For the purpose of enforcing any and all rights and
remedies under this Mortgage the Lender may (i) require the Mortgagor to, and
the Mortgagor agrees that it will, at its expense and upon the request of the
Lender, forthwith assemble all or any part of the Collateral as directed by the
Lender and make it available at a place designated by the Lender which is, in
its opinion, reasonably convenient to the Lender and the Mortgagor, whether at
the premises of the Mortgagor or otherwise, and Lender shall be entitled to
specific performance of this obligation, (ii) to the extent permitted by
applicable law of this or any other state, enter, with or without process of law
and without breach of the peace, any premise where any of the Collateral is or
may be located, and without charge or liability to it seize and remove such
Collateral from such premises, (iii) have access to and use the Mortgagor’s
books and records relating to the Collateral, and (iv) prior to the disposition
of the Collateral, store or transfer it without charge in or by means of any
storage or transportation facility owned or leased by the Mortgagor, process,
repair or recondition it or otherwise prepare it for disposition in any manner
and to the extent the Lender deems appropriate and, in connection with such
preparation and disposition, use without charge any trademark, trade name,
copyright, patent or technical process used by the Mortgagor.




Section
5.14 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 warehouse man, carrier, forwarding agency, consignee or
other agent or bailee selected by the Lender in good faith.




Section
5.15
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
effectual operation of the provisions hereof and may be specified in the
instrument of appointment.




ARTICLE
6




MISCELLANEOUS




Section
6.1 Notices. Any notice or demand which, by provision of this Mortgage,
is required or permitted to be given or served to the Mortgagor and the Lender
shall be deemed to have been sufficiently given and served for all purposes if
made in accordance with the Loan Agreement to the following
addresses:





	
      If
      to Mortgagor:
	
       NGS
      Sub. Corp.

	 	
       820
      Gessner, Suite 1340

	 	
       Houston,
      Texas 77024

	 	 
	 	
       Attention:
      Robert S. Hlerlin

	 	 
	
      If
      to Lender:
	
       Prospect
      Energy Corporation

	 	
       10
      East 40th
      Street,
      Suite 4400

	 	
       New
      York, New York 10016

	 	 
	 	
       Attention:
      John Barry







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




Section
6.3 Invalidity. In the event that any one or more of the provisions contained in
this Mortgage shall, for any reason, be held invalid, illegal or unenforceable
in any respect, such invalidity, illegality or unenforceability shall not affect
any other provision of this Mortgage.




Section
6.4 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














26
















exercising
any of its rights, powers or privileges under this Mortgage shall operate as a
waiver thereof




Section
6.5 Cumulative Rights. The rights and remedies of the Lender under this Mortgage
and the Collateral Documents 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
6.6 Titles of Articles, Sections and Subsections. All titles or headings to
articles, sections, subsections or other divisions of this Mortgage or the
exhibits hereto 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 articles, sections, subsections or other divisions, such other content
being controlling as to the agreement between the parties hereto.




Section
6.7 Singular and Plural. Words used herein in the singular, where the context so
permits, shall be deemed to include the plural and vice versa. The definitions
of words in the singular herein shall apply to such words when used in the
plural where the context so permits and vice versa.




Section
6.8 Termination. Upon full and final payment and performance of the Indebtedness
and the termination of the Loan Agreement, this Mortgage shall terminate, and
the Lender shall pay to the Mortgagor all amounts then remaining in the
possession of the Lender from collections on or proceeds of the Collateral. Upon
request of the Mortgagor, the Lender shall execute and deliver to the Mortgagor
at the Mortgagor’s expense such termination statements as the Mortgagor may
reasonably request to evidence such termination.




Section
6.9 Successors and Assigns. (a) All covenants and agreements contained by or on
behalf of the Mortgagor in this Mortgage shall bind its successors and assigns
and shall inure to the benefit of the Lender and its successors and
assigns.




(b)
This Mortgage 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 Mortgage shall be transferrable and negotiable, with the
same force and effect and to the same extent as the Indebtedness may be
transferrable, 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 Mortgage. The Mortgagor
specifically agrees that upon any transfer of all or any portion of the
Indebtedness, this Mortgage shall secure with retroactive rank the then existing
Indebtedness to the transferee and any and all Indebtedness to such transferee
thereafter arising.




(c)
If less than all of the Indebtedness secured by this Mortgage is transferred,
each part of such Indebtedness shall share pro-rata in the security of this
Mortgage as provided by Louisiana Civil Code Article 3311, and the Lender or
subsequent transfer or shall not be deemed to have warranted or agreed to have
subordinated any remaining or future Indebtedness to that portion of such
Indebtedness transferred.

 











27
















(d)
The Mortgagor hereby recognizes and agrees that the Lender may, from time to
time, one or more times, transfer all or any portion of the Indebtedness to one
or more third parties. Such transfers may include, but are not limited to, sales
of participation interests in such Indebtedness in favor of one or more third
party lenders. Upon any transfer of all or any portion of the Indebtedness, the
Lender may transfer and deliver any or all of the Collateral to the transferee
of such Indebtedness and such Collateral shall secure any and all of the
Indebtedness in favor of such a transferee then existing and thereafter arising,
and after any such transfer has taken place, the Lender shall be fully
discharged from any and all future liability and responsibility to the Mortgagor
with respect to such Collateral, and the transferee thereafter shall be vested
with all the powers, rights and duties with respect to such
Collateral.




SECTION
6.10 GOVERNING LAW. THIS MORTGAGE IS 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
6.11 Certificates. The production of mortgage, conveyance, tax research or other
certificates is waived by consent, and the Mortgagor agrees to hold me, Notary,
harmless for failure to procure and attach same.




Section
6.12 Acceptance. Pursuant to Louisiana Civil Code Article 3289, this Mortgage
need not be signed by the Lender, and the Mortgagor hereby confirms that the
Lender’s consent to and acceptance of this Mortgage shall be irrevocably
presumed.














28
















THUS
DONE AND PASSED in the place and on the day and in the month and year
hereinabove written, in the presence of the two undersigned witnesses who
hereunto sign their names with the Mortgagor and me, Notary, after due reading
of the whole.

 


	 WITNESSES:	 	 MORTGAGOR: NGS SUB. CORP.
	 	 	 
		 	
       By:   
	
	
      

    	 	 	
      

      Name:
Title:











 NOTARY
PUBLIC














29