Document:

Exhibit 10.9

               FORM OF AMENDMENT TO SECURITIES PURCHASE AGREEMENT

         Reference is made to the Securities Purchase Agreement (together with
the schedules and exhibits hereto, the "Agreement"), dated as of December 31,
2004, by and between Advance Nanotech, Inc., a Colorado corporation (the
"Company"), and each of the Persons (as defined in the Securities Purchase
Agreement) who has executed a signature page to the Securities Purchase
Agreement and whose subscription has been accepted by the Company (each a
"Purchaser," and together, the "Purchasers").

         All capitalized terms not otherwise defined herein have the meanings
assigned to such terms in, or by reference in, the Agreement.

         As described in Section 1.1 of the Agreement, the Company is engaged in
the Offering of up to 7,000,000 shares of Common Stock at $2.00 per share,
subject to the right of the Company, in its sole discretion, to increase the
Offering by up to ten percent (10%). In addition to the Shares, for every two
Shares acquired by a Purchaser at an applicable Closing pursuant to the
Agreement, the Company shall deliver to such Purchaser a Warrant to purchase one
share of Common Stock at $3.00 per share.

         Pursuant to Section 2 of the Agreement, the Final Closing will take
place on the earlier to occur of (i) December 31, 2004 or (ii) the sale of all
of the Securities being offered hereby, unless the date is extended, without
notice to investors, by the Company in its sole discretion for up to an
additional 30 days. The Company has so extended the date for the Final Closing
and the Termination Date.

         Section 11.3 of the Agreement provides that the Agreement may be
amended by mutual written agreement of the Company and a majority in interest of
the Purchasers.

         The Company and the undersigned Purchasers, who constitute Purchasers
of a majority of shares sold to date in the Offering, have determined that in
view of the over subscription for the Offering and the Company's business plans,
it is in the best interests of the Company and its shareholders to increase the
number of shares being offered in the Offering and to further extend the date
for the Final Closing and the Termination Date of the Offering.

         NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, and intending to be bound hereby,
the parties hereby agree as follows:

         1. The Agreement is hereby amended to provide that the Company may sell
an aggregate of up to 10,000,000 shares in the Offering pursuant to the
Agreement (inclusive of shares sold in the Offering to date), with no
overallotment option beyond the 10,000,000 shares. The Shares shall otherwise be
sold on the same terms and conditions as heretofore existing including, without
limitation, the purchase price of $2.00 per share and one Warrant for every two
(2) Shares purchased in the Offering.

         2. The Agreement is further amended to provide that the Company, in its
sole discretion, and without notice, may extend the date for the Final Closing
and the Termination Date to not later than Wednesday, February 2, 2005.

         3. The other Transaction Documents are amended as necessary to reflect
the foregoing amendment.

         4. As so amended, the Agreement and the other Transaction Documents
remain in full force and effect.

         5. This Amendment to the Agreement may be executed in two or more
counterparts, each of which will be deemed an original, but all of which will
together constitute the same instrument.

         6. This Amendment to the Agreement shall be governed by and construed
in accordance with the laws of the State of New York with respect to contracts
made and to be fully performed therein, without regard to the conflicts of laws
principles thereof.

         IN WITNESS WHEREOF, the undersigned, being duly authorized to do the
same, have executed and delivered this Amendment to the Agreement, as of January
27, 2005.

         ADVANCE NANOTECH, INC.

By:  /s/ Magnus Gittins
-----------------------------
Magnus Gittins
Chief Executive Officer

         [PURCHASER: Name]NGS/Prospect
Loan Agreement - DRAFT 2/1/2005

LOAN
AGREEMENT

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

 

ARTICLE
1

 

GENERAL
TERMS

 

Section
1.1 
  Terms
Defined Above. As used
in this Agreement, the terms “Agreement”, “Borrower”, and “Lender”, shall have
the meanings indicated above. 

 

Section
1.2 
  Certain
Definitions. As used
in this Agreement, the following terms shall have the meanings indicated (and as
provided in Section
9.14), unless
the context otherwise requires: 

 

“Advances”
shall mean the borrowings on the Closing Date under the Loan and all or any
portion of such borrowings and other or subsequent borrowings under the Loan so
long as same remain outstanding and unpaid.

 

“Affiliate”
shall mean, as to any Person, any Person controlling, controlled by or under,
control with such Person, and “Control” as used herein means the possession,
direct or indirect, of the power to direct or cause the direction of the
management or policies of the controlled Person.

 

“Amount”
shall mean the total amount drawn down by Borrower up to four million eight
hundred thousand ($4,800,000.00) dollars.

 

“Arkla”
shall mean Arkla Petroleum, L.L.C., a Louisiana limited liability company, a
wholly owned Subsidiary of NGS Sub and an indirect wholly owned Subsidiary of
the Borrower.

 

“Asset
Sale” shall mean the sale (in any single transaction or related series of
transactions) by Borrower or any of its Restricted Subsidiaries of fifty (50%)
percent or more of the assets of Borrower and its Restricted Subsidiaries, taken
as a whole. Notwithstanding the foregoing, Asset Sale does not include sales of
assets between the Borrower and any Restricted Subsidiary or between any
Restricted Subsidiaries.

 

“Base
Rate” shall mean, for any day, an interest rate per annum equal to the greater
of (a) fourteen (14%) percent, or (b) the Treasury Rate in effect on the last
day of the preceding calendar month plus nine (9%) percent (except that the Base
Rate in effect on the Closing Date shall be 14%).

 

 

NGS/Prospect
Loan Agreement 

“Borrowing
Base” shall mean, at any time, the dollar amount calculated as the discounted
present value of the future Net Cash Flows of Proved Developed Reserves that
constitute Collateral based upon the future production, capital expenditures and
operating expenses utilized in the Borrower’s most recent independent
engineering report prepared for filing with the SEC each year, as determined by
the Lender. This calculation shall be made by the Lender using a discount rate
of ten (10%) percent, and based upon pricing for 2005 of $35.00 / bbl for oil
and $5.00 / Mcf for gas, and during subsequent years calculated as a ten percent
discount to the average price of New York Mercentile Exchange Henry Hub Crude
Oil and Natural Gas Futures for the forward twelve months as of the date of any
future reserve report, all as adjusted by the inclusion of any hedging
arrangements in place. Any good faith determination by the Lender of the
Borrowing Base shall be final and conclusive. The Borrowing Base will be revised
by Lender after receipt of each annual independent engineering report delivered
to the Lender by the Borrower pursuant to this Agreement. The Lender shall
notify the Borrower of the result of each annual Borrowing Base redetermination
by the Lender which shall become effective upon such notice. Each annual
determination of the Borrowing Base shall be effective until redetermined by the
Lender in accordance with this Agreement. Without limiting the foregoing, the
Lender may exclude, in its sole and absolute discretion, any property or portion
of production therefrom from the Borrowing Base, at any time, because title
information on, or the status of title to, such property is not reasonably
satisfactory to Lender, such property is not Collateral, the Lender’s Lien
therein is not first and prior to all others (other than the holder of any
Future Senior Debt), such property is subject to contractual agreements or
commitments not reasonably satisfactory to Lender, or such property is not
assignable. The Borrower acknowledges that the Lender’s determination of the
Borrowing Base contains an equity cushion (market value in excess of loan
value), which is acknowledged by the Borrower to be essential for the adequate
protection of the Lender.

 

“Business
Day” shall mean a day other than a Saturday, Sunday or legal holiday for
commercial banks in New York, New York. 

 

“Change
of Control” shall mean the occurrence of either of the following: (a) the
consummation of any transaction which results in any “person” or “group” (as
such terms are used for purposes of Section 13(d) of the Securities Exchange Act
of 1934) other than the Permitted Holders becoming the beneficial owner of more
than 50% of the total voting power of all classes of the Borrower’s voting
securities then outstanding; or (b) the first day on which a majority of the
members of the Board of Directors of the Borrower shall cease to be Continuing
Directors.

 

 

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NGS/Prospect
Loan Agreement 

“Closing
Date” shall mean the date on which the Note is executed and delivered by the
Borrower to the Lender. 

 

“Code”
shall mean the Internal Revenue Code of 1986, as amended. 

 

“Collateral”
shall mean the properties and property rights described in the Collateral
Documents described in Section 3.1 as security for the Indebtedness.

 

“Collateral
Documents” shall mean collectively the documents from time to time required by
the Lender to obtain the security interest in the Collateral in accordance with
the terms of the Agreement, or otherwise guarantee or secure the Indebtedness,
or otherwise pertaining to this Agreement, such documents which exist on the
Closing Date being described in Article 3 hereof, as all such documents are
amended, restated or renewed from time to time.

 

“Commitment
Limit” shall mean, at any particular date, the lesser of (x)
the Amount or (b) the Borrowing Base as then in effect.

 

“Companies”
shall mean collectively, on the Closing Date, the Borrower, NGS Delaware, NGS
Sub, Arkla and Four Star, and “Company” shall mean any one of the
Companies.

 

“Continuing
Directors” of a Person shall mean any member of such Person’s Board of Directors
who: (x) was a member of such Person’s Board of Directors on the Closing Date;
or (y) was nominated for election or elected with the approval of a majority of
the Continuing Directors who were then members of such Person’s Board of
Directors (but excluding any such individual whose initial assumption of office
occurs as a result of either an actual or threatened election contest or other
actual or threatened solicitation of proxies or consents by or on behalf of a
Person other than the Continuing Directors).

 

“Contracts”
shall mean those agreements, contracts and other instruments to which the
interests in the oil, gas and mineral leases comprising the Collateral are
subject.

 

 

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NGS/Prospect
Loan Agreement 

“Debt”
shall mean any and all amounts and/or liabilities owing from time to time by a
Company to any Person, including the Lender, direct or indirect, liquidated or
contingent, now existing or hereafter arising, including without limitation (i)
indebtedness for borrowed money or the deferred purchase price of property; (ii)
the amounts of all standby and commercial letters of credit and bankers
acceptances, matured or unmatured, issued on behalf of such Company, and
(without duplication) all drafts drawn thereon; (iii) guaranties of the
obligations of any other Person, whether direct or indirect, whether by
agreement to purchase the indebtedness of any other Person or by agreement for
the furnishing of funds to any other Person through the purchase or lease of
goods, supplies or services (or by way of stock purchase, capital contribution,
advance or loan) for the purpose of paying or discharging the indebtedness of
any other Person, or otherwise; (iv) loans or obligations of the types described
above secured by any Lien on any property owned by such Company, to the extent
attributable to such Company’s interest in such property, even though such
Company has not assumed or become liable for the payment thereof personally; (v)
the present value of all obligations for the payment of rent or hire of property
of any kind (real or personal) under leases or lease agreements required to be
capitalized under generally accepted accounting principles (“GAAP”); (vi)
obligations of such Company owing in respect of redeemable preferred stock; or
(vii) obligations of such Company owing in connection with any volumetric
production payments. Notwithstanding the foregoing, Debt shall not include trade
payables incurred in the ordinary course of business.

 

“Default”
shall mean the occurrence of any of the events specified in Article 8 hereof,
whether or not any requirement for notice or lapse of time or other condition
precedent has been satisfied.

 

“Default
Rate” shall mean, on any particular date, the Base Rate plus five
(5%) percent per annum.

 

“Delhi”
means the working interests owned by NGS Sub in the Delhi field located
primarily in Richland Parish, Louisiana, acquired by NGS Sub in September,
2003.

 

“DSR
Account” shall mean the senior debt service reserve account established pursuant
to Section
5.16 to meet
potential shortfalls in interest or principal payments on the Loan.

 

“EBITDA”
shall mean, for the period in question, the sum of the Borrower’s and its
Restricted Subsidiaries’ (i) net income for that period on a consolidated basis
in accordance with GAAP, plus (ii) any extraordinary loss and other expenses not
considered to be operating in nature reflected in such net income, minus (iii)
any extraordinary gain, interest income and other income not considered
operating in nature reflected in such net income, plus (iv)
depreciation, depletion, amortization and all other non-cash expenses for that
period, plus (v) all
interest, fees, charges and related expenses paid or payable (without
duplication) for that period that are considered “interest expense” under
generally accepted accounting principles, together with the portion of rent paid
or payable (without duplication) for that period under capital lease obligations
that should be treated as interest in accordance with Financial Accounting
Standards Board Statement No. 13, plus (vi) the
aggregate amount of federal, state and local taxes on or measured by income for
that period (whether or not payable during that period) (but, for the avoidance
of doubt, net of severance and other taxes on or measured by production volumes
for that period). Notwithstanding the foregoing, for purposes of calculating
EBITDA, singular, annual event type expenses, as determined by the Borrower but
subject to the Lender’s approval, not to be unreasonably withheld, as to any
such expenses which would not be considered recurring under generally accepted
accounting principles (including but not limited to third party costs of the
annual audit, engineering report, annual audit, 10K and proxy, annual bonuses
and costs of preparing a filing registration statements with the SEC) shall be
allocated to net income monthly over the prospective one year period.

 

 

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NGS/Prospect
Loan Agreement 

“ERISA”
shall mean the Employee Retirement Income Security Act of 1974, as amended.

 

“Event of
Default” shall mean the occurrence of any of the events specified in Article 8
hereof, provided that any requirement for notice or lapse of time or any other
condition precedent has been satisfied.

 

“Excluded
Sale” shall have the meaning set forth in Section
2.5(b).

 

“Four
Star” shall mean Four Star Development Corporation, a Louisiana corporation, a
wholly owned Subsidiary of NGS Sub and an indirect wholly owned Subsidiary of
the Borrower.

 

“Future
Senior Debt” shall have the meaning set forth in Section
2.12.

 

“Hedge
Agreement” shall mean any agreement or arrangement providing for payments which
are related to, or the value of which is dependent upon, fluctuations of
interest rates, currency exchange rates or forward rates, or fluctuations of
commodity prices, including without limitation any swap agreement, cap, collar,
floor, exchange transaction, forward agreement or exchange or protection
agreement or similar futures contract or swap or other derivative agreement
related to interest rates, currency exchange rates or hydrocarbons or other
commodities, or any option with respect to such transaction.

 

 

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NGS/Prospect
Loan Agreement 

“Hedging
Obligations” of a Person shall mean any and all obligations of such Person,
whether absolute or contingent and howsoever and whensoever created, arising or
evidenced (including all renewals, extensions and modifications thereof and
substitutions therefore), under any and all Hedge Agreements and any and all
cancellations, buybacks, reversals, terminations or assignments of any Hedge
Agreement, net of any offsets or corresponding physical prices.

 

“Hedging
Program” shall have the meaning set forth in Section
5.18.

 

“Herlin”
shall mean Robert S. Herlin.

 

“Indebtedness”
shall mean any and all amounts, liabilities or obligations owing from time to
time by the Borrower to the Lender (or any transferee of the Note), including
without limitation any such amounts, liabilities or obligations pursuant to this
Agreement, the Note and the Collateral Documents (including reasonable
attorneys’ fees incurred in connection with the execution, enforcement or
collection of the Borrower’s obligations hereunder or thereunder or any part
thereof) or any Hedging Obligations owing to the Lender, and whether such
amounts, liabilities or obligations be liquidated or unliquidated, now existing
or hereafter arising.

 

“Interest
Expense” shall mean, for each period, the sum of all interest, fees, charges and
related expenses payable (without duplication) for that period to a lender in
connection with borrowed money or the deferred purchase price of assets that are
considered “interest expense” under generally accepted accounting principles,
plus the portion of rent paid or payable (without duplication) for that period
under capital lease obligations that should be treated as interest in accordance
with Financial Accounting Standards Board Statement No. 13.

 

“Lien”
shall mean 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, production payment, conditional sale, bond for deed 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 Agreement, the Borrower 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.

 

 

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NGS/Prospect
Loan Agreement 

“Loan”
shall mean the line of credit as described in Article 2 hereof.

 

“Loan
Excess” shall mean, at any point in time, the amount, if any, by which the
outstanding principal balance of the Advances exceeds the Commitment Limit then
in effect.

 

“Mandatory
Prepayment Event” shall have the meaning set forth in Section
2.5.

 

“Material
Adverse Effect” means a material adverse change in, or a material adverse effect
upon, the operations, business, assets, properties, liabilities, contractual
obligations or condition (financial or otherwise), of the Borrower and its
Restricted Subsidiaries, when taken as a whole.

 

“Maturity
Date” shall mean the fifth anniversary of the Closing Date, or such earlier date
on which the Loan is accelerated pursuant to Section
8.2
hereof.

 

“Net Cash
Flows” shall mean the revenue less royalty interests, production taxes, direct
operating expenses, and net investment, of Borrower and its Restricted
Subsidiaries, calculated in accordance with GAAP. 

 

“Net
Production” shall mean the amount of crude oil, condensate, natural gas liquids
and natural gas being produced by the assets in which NGS or its Subsidiaries
maintains a working interest, multiplied by that percentage net revenue
interest.

 

“NGS
Delaware” shall mean Natural Gas Systems, Inc., a Delaware corporation and
wholly owned subsidiary of the Borrower.

 

 

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NGS/Prospect
Loan Agreement 

“NGS Sub”
shall mean NGS Sub. Corp., a Delaware corporation, a wholly owned subsidiary of
NGS Delaware and an indirect wholly owned Subsidiary of the
Borrower.

 

“Note”
shall mean the note described in Article 2 hereof, together with any
replacements, renewals, modifications, amendments or extensions
thereof.

 

“Patriot
Act” shall have the meaning set forth in Section
4.22.

 

“Permitted
Hedge Agreement” shall mean any Hedge Agreement related to either (i) a
Company’s production and sale of its hydrocarbons or (ii) interest rates
pertaining to the Loan, in each case which a Company enters into (x) in the
ordinary course of business as part of its normal business operations with the
purpose and effect of fixing prices or hedging variable interest rates as a
risk-management strategy, and not for purposes of speculation and not intended
primarily as a borrowing of funds, and (y) with any Person as counterparty
reasonably acceptable to the Lender.

 

“Permitted
Holders” means Laird Q. Cagan, Eric M. McAfee and Robert S. Herlin, and their
respective estates, spouses, heirs, ancestors, lineal descendants (including
adopted children and their lineal descendants), legatees, and legal
representatives, the trustee of any bona fide trust of which one or more of the
foregoing are the sole beneficiaries or the grantors thereof and any Person in
which any of the foregoing. individually or collectively, beneficially own all
of the outstanding equity interest or which was established for the exclusive
benefit of, or the estate of, any of the foregoing or their
spouses.

 

“Person”
shall mean any individual, corporation, limited liability company, partnership,
joint venture, association, joint stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof, or any
other form of entity.

 

“Plan”
shall mean any plan subject to Title IV of ERISA and maintained by the Borrower,
or any such plan to which the Borrower is required to contribute on behalf of
its employees.

 

“Prepayment
Premium” shall have the meaning set forth in Section
2.4.

 

“Proved
Developed Reserves” shall mean, at any particular time, the estimated quantities
of crude oil, condensate, natural gas liquids and natural gas which geological
and engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs attributable to the Borrower’s or a
Subsidiary’s Collateral included in the Borrowing Base under then existing
economic and operating conditions (i.e., prices and costs as of the date the
estimate is made and prices set forth herein), by established operating
practices and under current government regulations, where such reserves are
expected to be recovered from existing wells and installed facilities or, if
facilities have not been installed, that would involve a relatively low
expenditure (when compared to the cost of drilling a well) to put the reserves
on production. Such Reserves may include both producing and non-producing wells.
Reserves which can be produced economically through application of improved
recovery techniques (such as fluid injection) will be included in Proved
Reserves when successful testing by a pilot project or the operation of an
installed program in the reservoir provides support for the engineering analysis
on which the pilot project or installed program was based. In general, the
economic productivity of the estimated proved reserves is supported by actual
production in the given well or a nearby well in the same
reservoir.

 

 

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NGS/Prospect
Loan Agreement 

“Restricted
Subsidiary” means any Subsidiary of the Borrower which at the time of
determination is not an Unrestricted Subsidiary.

 

“Revocable
Warrants” shall mean the detachable revocable warrants delivered to the Lender
as described in Section
3.3.

 

“Subsidiary”
shall mean each corporation or limited liability company of which the Borrower
owns, directly or indirectly, a controlling interest (more than fifty percent)
of the outstanding capital stock or membership interests. Working interests
partnerships shall not be deemed to be Subsidiaries.

 

“Total
Debt” shall mean, at any time, the sum of (a) the outstanding principal balance
on the Loan plus (b) the principal balance of all Debt of the Borrower and its
Restricted Subsidiaries for borrowed money and capitalized leases (whether short
or long term) that is pari passu with the Loan or has priority over the Loan in
right of payment. However, any Debt described in Subsections
6.1(k) or
6.1(l) shall
not be included in Total Debt.

 

“Treasury
Rate” shall mean the rate offered on five-year (5) U.S. Treasury securities
trading nearest to par as reported in The Wall Street Journal.

 

“Tullos
I” shall mean the portion of the Tullos Urania Field in LaSalle Parish,
Louisiana, acquired by NGS Sub by that certain Act of Sale and Assignment
executed September 2, 2004, by Atkins Production Inc., and Monty and Margaret
Atkins.

 

“Tullos
II” shall mean the interests in the Tullos Urania and Colgrade Fields, LaSalle
and Winn Parishes, Louisiana, currently intended to be acquired by the Borrower
or a Restricted Subsidiary from Chadco Inc.

 

 

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NGS/Prospect
Loan Agreement 

“Unrestricted
Subsidiary” means any Subsidiary of the Borrower which at the time of
determination is an Unrestricted Subsidiary (as designated by the Borrower’s
Board of Directors) and any Subsidiary of an Unrestricted Subsidiary. The
Borrower’s Board of Directors may designate any Subsidiary of the Borrower
(including any newly acquired or newly formed Subsidiary) to be an Unrestricted
Subsidiary, unless such Subsidiary owns any capital stock of, or owns or holds a
Lien on any property of, any other Subsidiary of the Borrower which is not a
Subsidiary of the Subsidiary to be so designated; and provided
further that,
notwithstanding the foregoing, the Borrower may not designate as an Unrestricted
Subsidiary NGS Delaware, NGS Sub, Arkla or Four Start. 

 

“Warrants”
shall mean the detachable warrants delivered to the Lender as described in
Section
3.2.

 

Section
1.3 
  Accounting
Terms. Unless
otherwise specified herein, all accounting terms used herein shall be
interpreted, all accounting determinations hereunder shall be made, and all
financial statements required to be delivered hereunder shall be prepared in
accordance with generally accepted accounting principles as in effect from time
to time on a basis consistent (except for changes in accounting principles or
practice approved by independent public accountants for the Borrower) with the
most recent financial statements of the Borrower.

 

ARTICLE
2

THE
CREDIT

 

Section
2.1 
  Loan.

 

(a) 
  Loan. Subject
to and upon the terms and conditions contained in this Agreement, and relying on
the representations and warranties contained in this Agreement, on the Closing
Date the Lender agrees to loan to Borrower, in the form of one or more Advances,
a maximum aggregate principal amount equal to the Commitment Limit. The Loan
shall be represented by one or more promissory notes not to exceed a combined
amount of four million eight hundred thousand ($4,800,000.00) dollars, payable
to the order of the Lender. Principal, all accrued and unpaid interest, fees and
Prepayment Premiums, if any, on the Loan shall be payable in full on the
Maturity Date. During the continuance of an Event of Default, overdue payments
with respect to the Loan may be debited from the Borrower’s DSR Account as
provided in this Agreement or other written agreement between Borrower and
Lender.

 

 

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NGS/Prospect
Loan Agreement 

(b) 
  Interest. Subject
to Section
2.11 the
interest rate applicable to each Loan Advance beginning on the date such Advance
is made shall be the Base Rate then in effect, adjusted monthly. Interest on the
Loan shall be payable at the Base Rate monthly in arrears on the last day of
each month, commencing January 31, 2005, and the last day of each calendar month
thereafter. Interest on Advances and all fees and other Indebtedness shall be
calculated on the basis of a 365 (or in a leap year 366) day year and the actual
number of days elapsed.

 

(c) 
  Draw
Requests. In
accordance with the provisions in this Section, the Lender will make Advances to
the Borrower from time to time on any Business Day within and expiring ninety
(90) after the Closing Date in such amounts as the Borrower may request in
increments of at least $100,000.00 or a multiple of $100,000.00 up to a total
not to exceed the Commitment Limit. Borrower shall draw a minimum aggregate
amount of $3,000,000.00 on the Closing Date and may draw additional amounts up
to the Commitment Limit within the subsequent ninety (90) days. Requests for
Advances must be made by written notice from the Borrower and sent to the Lender
by mail, courier or facsimile in accordance with Section
9.1 or in
accordance with Section
2.10
specifying the amount of the Advance. A request shall be authorized by the
Borrower if made by any one of the Persons designated by the Borrower in the
Note or otherwise as an authorized person in accordance with resolutions of the
Board of Directors of the Borrower certified to the Lender. The Lender may rely
fully and completely upon the authority of the signatory of such request or
confirmation unless such authority is terminated by written notice to the
Lender, and any such termination shall be effective only prospectively. The
request for any Advance by the Borrower shall constitute a certification by the
Borrower that all of the representations and warranties contained in Article 4
(other than those representations and warranties, if any, that are by their
specific terms limited in application to a specific date) are true and correct
in all material respects when taken as a whole as of the date of such request
and also as of the date of the Advance. 

 

(d) 
  Timing After
the Lender’s receipt of an authorized request for Advance, the Lender will make
such Advance for the benefit of the Borrower in same day funds as provided below
upon fulfillment of the applicable conditions set forth in this Agreement.
Requests for Advances shall be made on written notice from the Borrower to the
Lender, received by the Lender no later than 11:00 a.m. (Eastern Time) on the
first Business Day before such Advance specifying the amount thereof. Each such
written notice by the Borrower shall be irrevocable by the Borrower. Not later
than 3:00 p.m. (Eastern Time) on the date properly and timely requested for the
Advance and upon fulfillment of the applicable conditions set forth in Article 7
of this Agreement, the Lender will make such Advance available to the Borrower
in same day funds. The Borrower irrevocably agrees in favor of the Lender that
the deposit of the proceeds of any Advance in any account of Borrower designated
by Borrower shall be deemed prima facie evidence of the Borrower’s Indebtedness
to the Lender under the Loan.

 

Section
2.2 
  Business
Days. If the
date for any payment, prepayment, or fee payment hereunder falls on a day which
is not a Business Day, then for all purposes of this Agreement (unless otherwise
provided herein) the same shall be deemed to have fallen on the next following
Business Day, and such extension of time shall in such case be included in the
computation of payments of interest. 

 

 

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Loan Agreement 

Section
2.3 
  Payments. The
Borrower shall make each payment hereunder and under the Note and any Collateral
Documents in lawful money of the United States of America in same day funds to
the Lender at its main office in New York, New York, not later than 11:00 a.m.
(Eastern Time) on the day when due, or such other place in the United States as
designated in writing by the Lender. The Borrower hereby authorizes the Lender
to charge from time to time against the Borrower’s DSR Account any amount which
is past due, after taking into account any applicable grace
periods.

 

Section
2.4 
  Voluntary
Prepayment. The
Borrower may prepay the Loan in full or in part but only on and subject to the
terms set forth below. It is agreed that (i) the Borrower shall give the Lender
notice of each such prepayment of all or any portion of an Advance no less than
five (5) Business Days prior to prepayment, (ii) the Borrower shall pay all
accrued and unpaid interest on the amounts prepaid, and (iii) no such prepayment
shall serve to postpone the repayment when due of any other Indebtedness. Each
voluntary prepayment shall be in an aggregate principal amount of (x)
$100,000.00 or a multiple of $100,000.00 in excess thereof or (y) if the
outstanding principal balance of the Loan is less than the minimum amount set
forth in the preceding clause (x) of this sentence, then such lesser outstanding
principal balance, as the case may be. Any optional prepayment in full shall be
accompanied by all fees, expenses, accrued interest, and the Prepayment Premium
set forth in the following sentences. When making any optional prepayment on the
Loan, whether partial or in full, the Borrower must pay to the Lender as
additional consideration (the “Prepayment
Premium”) on the
date of such prepayment an amount equal to a percentage, varying depending upon
the Loan quarter in which the prepayment occurs, of the principal amount being
prepaid. If the prepayment is received during the first quarter of the Loan (the
period commencing on the Closing Date and ending three months later), the
Prepayment Premium shall be ten (10.0%) percent of the portion of the principal
amount of the Loan being prepaid. Thereafter, for each successive three month
period the Prepayment Premium shall reduce one-half (0.5%) percent, to reach
zero at five (5) years from the Closing Date. (If the Closing Date occurs on a
day of an initial calendar month for which there is no numerical corresponding
day in the third calendar month succeeding such initial calendar month, such
quarter shall end on the last day of such third succeeding calendar month).

 

Section
2.5 
  Mandatory
Prepayment.

 

(a) 
  Upon the
occurrence of a Mandatory Prepayment Event defined below, the Borrower shall
immediately prepay the Loan as described herein, accompanied by payment of all
fees, expenses, and accrued interest thereon. Any of the following events shall
be considered a “Mandatory
Prepayment Event” as that
term is used herein: (i) a Change of Control of the Borrower; (ii) an Asset
Sale; or (iii) an Event of Default.

 

(b) 
  No later
than the first Business Day following the day of receipt by the Borrower or any
of its Restricted Subsidiaries of Net Asset Sale Proceeds (as defined below) in
respect of any sale of any assets (whether tangible or intangible) consisting of
lesser amounts of assets than an Asset Sale, except for an Excluded Sale, the
Borrower shall either, at its option, (i) prepay the Loan in an aggregate amount
equal to 100% of the amount of such Net Asset Sale Proceeds, and the Commitment
Limit shall be permanently reduced by that amount or (ii) redeem, prepay or
retire any outstanding Debt that is senior in right of payment to the
Indebtedness or that is secured by the assets sold. For the avoidance of doubt,
the sale of assets covered by this Section
2.5 includes
the sale (in any single transaction or related series of transactions) by the
Borrower or any of its Restricted Subsidiaries of any tangible or intangible
assets, except an Excluded Sale. The proceeds of any Excluded Sale may be used
by the Borrower or its Restricted Subsidiary for any purpose not prohibited by
this Agreement. “Excluded
Sale” shall
mean (x) sales of production in the ordinary course of business, (y) sales of
items of equipment in the ordinary course of business which are obsolete or
otherwise no longer useful for such Person’s operations, and (z) sales of assets
in an amount, when added to the total amount of all sales of assets made by the
Borrower and its Restricted Subsidiaries during the immediately preceding six
month period pursuant to this clause (z) shall not exceed twenty (20%) percent
of the assets of the Borrower and its Restricted Subsidiaries as of the first
day of such six month period. “Net
Asset Sale Proceeds” shall
mean the cash payments (including any cash received by way of deferred payment
pursuant to, or by monetization of, a note receivable or otherwise, but only as
and when so received) received from such asset sale, net of any bona fide direct
costs reasonably incurred in connection with such asset sale such as any
reasonable brokerage fees, commissions and other similar expenses relating to
such asset sale. 

 

 

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(c) 
  The
Lender shall notify the Borrower of the result of each annual Borrowing Base
redetermination by the Lender. If at any time the Lender determines that a Loan
Excess exists, then within sixty (60) days of receipt by the Borrower of written
notice of such Loan Excess the Borrower shall (x) prepay the Advances (together
with accrued interest on the amount
to be repaid to the date of payment but without Prepayment Penalty) in an amount
sufficient to reduce the Advances to the then Commitment Limit, or (y) execute,
deliver and record or cause to be executed and delivered such additional
Collateral Documents pursuant to Section
3.1,
sufficient to induce the Lender to make a permanent increase in the Borrowing
Base to an amount not less than the outstanding principal balance of the
Advances. Notwithstanding anything to the contrary, such redeterminations of the
Borrowing Base shall occur only once per twelve month period. The Borrower
specifically acknowledges that no additional grace period (beyond the period
stated in this section) is applicable under this Agreement to any failure to
make such mandatory prepayment before such failure is an Event of Default
hereunder.

 

Section
2.6 
  Fees.

 

(a) 
  The
Borrower shall pay the Lender an up front commitment fee in the amount equal to
$96,000.00 (being 2.00% of $4,800,000) on the Closing Date.

 

Section
2.7 
  Use of
Proceeds.

 

(a) 
  The
Borrower shall use the proceeds of the Loan in connection with the acquisition
and development of oil and gas properties as well as general working capital
purposes and the repayment of Debt permitted by the terms of this Agreement, all
as set out on Schedule
2.7.
The
Borrower shall not use the proceeds of any Advances under the Loan for
exploratory drilling or acquisitions of additional oil and gas properties
outside of Delhi, Tullos I or Tullos II without the Lender’s prior written
consent, which shall not be unreasonably withheld. The Borrower shall not use
any portion of the Advances under the Loan to pay any outstanding debt owing to
Laird Cagan except as permitted by Section
6.16.

 

 

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(b) 
  No part
of the proceeds of the Loan will be used, directly or indirectly, (i) to fund,
make or advance a personal loan to or for the benefit of a director or executive
officer of a Borrower or any Subsidiary (except for advances of approved
business expenses), or (ii) to fund acquisitions of fixed long-term assets of
the Borrower or any Subsidiary, except for assets acquired by the Borrower or a
Restricted Subsidiary in the ordinary course of business as an exploration and
production company engaged in acquiring and exploring oil and gas properties and
on which a Lien is granted to Lender.

 

Section
2.8 
  Default
Rate.
Anything in the Note or in any other agreement, document or instrument to the
contrary notwithstanding, effective upon an Event of Default or after the
Maturity Date the Lender shall have the right to prospectively increase the
interest rate under the Note to the Default Rate until no Event of Default is
continuing or the Note is paid in full. Upon the acceleration of the principal
amount of the Indebtedness represented by the Note, the accelerated principal
balance of the Indebtedness shall bear interest from the date of acceleration up
to the actual payment (as well after as before judgment) at the Default Rate.
All such interest at the Default Rate shall be payable upon demand.

 

Section
2.9 
  [Omitted]

 

Section
2.10 
  Electronic
Notice to Lender. The
Borrower may transmit notices of borrowing or the like by electronic
communication, if arrangements for doing so have been approved by the
Lender.

 

Section
2.11 
  Change
in Interest Rate. The
Lender agrees that upon any new financing entered into between the Borrower and
the Lender after the Closing Date, the interest rate on this Loan, for the
remaining future life of this Loan at such time, will be revised downward to the
interest rate of such new financing.

 

Section
2.12 
  Future
Senior Debt.
The
Lender agrees that the Borrower may incur Debt senior to this Loan and
subject
its assets to Liens securing such senior Debt senior to the Liens in favor
of
the Lender (“Future
Senior Debt”)
provided that (i) Borrower is in compliance with Section
5.15
at closing of such additional
financing and (ii) Borrower is projected to comply with Section
5.15
for the remaining term of the Loan as determined by financial projections
approved by the Lender in writing at the time of such incremental borrowing,
where such approval may not be unreasonably withheld.  The terms of any
Future Senior Debt (i) shall be reasonable and typical for a senior secured debt
facility and (ii) shall not include the issuance of warrants or the payment of
PIK interest (except that the issuance of up to 10% warrant coverage and the
issuance of PIK interest in the form of shares of common stock shall be
permitted).  The
Lender agrees
to enter into (i) subordination
terms with the holder of such Future Senior Debt and (ii) amendments to this
Agreement to provide for such Future Senior Debt and senior Liens,
in each
case as
reasonably requested by the holder of
such Debt.

 

 

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Loan Agreement 

ARTICLE
3

 

SECURITY
FOR THE OBLIGATIONS

 

Section
3.1 
  Security. The
Loan shall be secured by the following:

 

(i) 
  Mortgage,
Collateral Assignment, Security Agreement and Financing Statement executed by
NGS Sub granting a first priority mortgage, security interest and assignment of
production in NGS Sub’s interests in Delhi, Tullos I and Tullos II in the State
of Louisiana and contracts, intangibles and other collateral relating thereto,
together with a UCC financing statement pertaining thereto.

(ii) 
  If and
when issued in accordance with Section
5.17, life
insurance in the amount of $1,500,000.00 insuring the life of Herlin, pledged to
the Lender by the Borrower to the extent of the outstanding Loan. 

(iii) 
  Guaranty
Agreement executed by NGS Delaware, NGS Sub, Arkla and Four Star. The Borrower
acknowledges that the Lender shall have the right to require that any newly
acquired or created Restricted Subsidiary become an additional guarantor
promptly upon Lender’s request. 

(iv) 
  Security
Agreement (stock) executed by the Borrower, granting a first priority security
interest in 100% of the outstanding shares of NGS Delaware, together with a UCC
financing statement pertaining thereto.

(v) 
  Security
Agreement (stock) executed by NGS Delaware, granting a first priority security
interest in 100% of the outstanding shares of NGS Sub, together with a UCC
Financing Statement pertaining thereto.

(vi) 
  Security
Agreement (stock) executed by NGS Sub, granting a first priority security
interest in 100% of the outstanding shares of Four Star and 100% of the
membership interestship of Arkla, together with a UCC Financing Statement
pertaining thereto. 

(vii) 
  A deposit
account control agreement executed by the depositary bank, the Borrower and the
Lender pertaining to the DSR Account. 

(viii) 
  Mortgage
or deed of trust executed by existing or to be created Restricted Subsidiaries
granting a first priority mortgage, security interest and assignment of
production in any acquired or developed assets held by existing or to be created
Restricted Subsidiaries in any oil and gas properties, including related
contracts, intangibles and other collateral, together with a UCC financing
statement pertaining thereto, where such acquired or developed assets have a
book value in excess of $100,000.00 and where such assets are acquired or
developed using Advances under the Loan.

Section
3.2 
  Warrants. At
Closing the Borrower shall deliver to the Lender the detachable warrants (the
“Warrants”)
exercisable, in the aggregate, for 450,000 shares of the Borrower’s common
stock. The Borrower shall deliver additional warrants of like tenor in the
amount of one share for every six and two thirds ($6.666667) dollars of
additional drawdowns on the Loan in excess of the initial $3,000,000.00 Advance
(so if the full additional $1,800,000.00 is drawn, then warrants for 270,000
shares). These Warrants shall be exercisable any time for five (5) years after
the Closing Date at an exercise price of $0.75 per share. The Warrants shall be
exercisable any time, have a cashless exercise feature and piggyback
registration rights, pursuant to the terms and conditions of the “Warrant
Agreement” and the “Registration Rights Agreement” executed by the Borrower
contemporaneously with this Agreement.

 

 

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Section
3.3 
  Revocable
Warrants. At
Closing, the Borrower shall deliver to the Lender the detachable revocable
warrants (the “Revocable Warrants”) exercisable, in the aggregate, for 300,000
shares of the Borrower’s common stock. All Revocable Warrants granted under this
Section 3.3, including the additional Revocable Warrants below, shall be
revocable without any further consideration by Borrower if Borrower and its
Subsidiaries, on a consolidated basis, reach an EBITDA of at least $200,000.00
per month for any three consecutive calendar months prior to February 1, 2006,
as described in the terms and conditions of the Revocable Warrant Agreement
executed by the Borrower contemporaneously with this Agreement. The Borrower
shall deliver additional Revocable Warrants of like tenor in the amount of 1
share for every ten ($10.00) dollars of additional drawdowns on the Loan in
excess of the initial $3,000,000.00 Advance. These Revocable Warrants shall be
exercisable, if not previously revoked, after March 15, 2006 until five (5)
years after the Closing Date at an exercise price of $0.75 share.

 

ARTICLE
4

 

 

REPRESENTATIONS
AND WARRANTIES 

 

In order
to induce the Lender to enter into this Agreement, the Borrower represents and
warrants to the Lender that: 

 

Section
4.1 
  Existence.

 

(a) 
  The
Borrower is a corporation duly organized, legally existing and in good standing
under the laws
of its state of incorporation (Nevada) and is duly qualified as a foreign
corporation in Texas and all other jurisdictions wherein the property it owns or
the business it transacts make such qualification necessary and the failure to
so qualify would have a Material Adverse Effect.

 

(b) 
  NGS
Delaware is a corporation duly organized, legally existing and in good standing
under the laws of its state of incorporation (Delaware) and is duly qualified as
foreign corporation in all other jurisdictions wherein the property it owns or
the business it transacts make such qualification necessary and the failure to
so qualify would have a Material Adverse Effect.

 

(c) 
  NGS Sub
is a corporation duly organized, legally existing and in good standing under the
laws of its state of incorporation (Delaware) and is duly qualified as a foreign
corporation in Louisiana and all other jurisdictions wherein the property it
owns or the business it transacts make such qualification necessary and the
failure to so qualify would have a Material Adverse Effect.

 

 

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(d) 
  Four Star
is a corporation duly organized, legally existing and in good standing under the
laws of its state of incorporation (Louisiana) and is duly qualified as a
foreign corporation in all other jurisdictions wherein the property it owns or
the business it transacts make such qualification necessary and the failure to
so qualify would have a Material Adverse Effect.

 

(e) 
  Arkla is
a limited liability company duly organized, legally existing and in good
standing under the laws of its state of organization (Louisiana) and is duly
qualified as a foreign limited liability company in all other jurisdictions
wherein the property it owns or the business it transacts make such
qualification necessary and the failure to so qualify would have a Material
Adverse Effect .

 

Section
4.2 
  Names,
Numbers and Offices.

 

(a) 
  The
Borrower is not currently doing business under any name (including trade names)
other than the name of the Borrower set forth above, except for its pre-merger
name Reality Interactive, Inc., until May 26, 2004. The Borrower’s Subsidiaries
do business only under their names, or the name of the Borrower, as provided in
this Agreement.

 

(b) 
  The
secretary of state registration number and locations of its state of
incorporation and chief executive office of each Company signing the Collateral
Documents are accurately set forth in the Collateral Documents.

 

(c) 
  The
Borrower’s chief executive office has been located in the State of Texas since
June 2004. 

 

Section
4.3 
  Power
and Authorization. Each
Company is duly authorized and empowered to execute, deliver and perform this
Agreement, the Note and the Collateral Documents and the Warrants executed by
it. All corporate action on the part of each Company (including all shareholder
action) requisite for the due creation and execution of the Loan and this
Agreement, the Note and Collateral Documents and the Warrants have been duly and
effectively taken. 

 

Section
4.4 
  Review
of Documents; Binding Obligations. Each
Company has reviewed this Agreement, the Note and the Collateral Documents and
the Warrants with counsel for such Company and has had the opportunity to
discuss the provisions thereof with the Lender prior to execution. This
Agreement, the Note and the Collateral Documents and the Warrants constitute
valid and binding obligations of each Company, which is a party thereto
enforceable in accordance with their terms (except that enforcement may be
subject to any applicable bankruptcy, insolvency or similar laws generally
affecting the enforcement of creditors’ rights). Each Company further represents
and warrants that it is in compliance with all of the affirmative and negative
covenants contained in this Agreement and the Collateral Documents.

 

Section
4.5 
  No
Legal Bar or Resultant Lien. This
Agreement, the Note and the Collateral Documents and the Warrants do not and
will not violate any provisions of any Company’s articles of incorporation or
bylaws, will not violate any contract, agreement, law, regulation, order,
injunction, judgment, decree or writ to which any Company is subject (except as
would not have a Material Adverse Effect), and will not result in the creation
or imposition of any Lien upon any property of any Company other than as
contemplated by this Agreement. 

 

 

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Section
4.6 
  No
Consent. The
Companies’ execution, delivery and performance of this Agreement, the Note and
the Collateral Documents and the Warrants do not require the consent or approval
of any other Person, including without limitation any regulatory authority or
governmental body of the United States or any state thereof or any political
subdivision of the United States or any state thereof.

 

Section
4.7 
  Financial
Condition. All
financial statements of the Borrower and any Affiliates delivered to Lender have
been submitted in good faith and fairly and accurately present the financial
condition of the parties for whom such statements are submitted and the
financial statements of the Borrower and any Affiliates have been prepared in
accordance with generally accepted accounting principles consistently applied
throughout the periods involved, and there are no contingent liabilities not
disclosed thereby which would adversely affect the financial condition of
Borrower or any Affiliates. Since the close of the period covered by the latest
financial statement delivered to Lender with respect to Borrower and any
Affiliates, there has been no material adverse change in the assets,
liabilities, or financial condition of Borrower or any Affiliates not disclosed
thereby. The Borrower has filed in a timely manner all reports required to be
filed with the Securities and Exchange Commission since June 2004, and all such
filings made by the Borrower with the Securities and Exchange Commission since
June 1, 2004, complied at the time of filing in all material respects with the
applicable requirements of the Securities Act of 1933 and the Securities
Exchange Act of 1934, as applicable, in each case as in effect on the dates such
filings were made.

 

Section
4.8 
  Taxes
and Governmental Charges. The
Companies have filed all tax returns and reports required to be filed and have
paid all taxes, assessments, fees and other governmental charges levied upon
them or upon their property or income which are due and payable, including
interest and penalties, or have filed an extension for payment thereof, or is
contesting the same in good faith by appropriate proceedings and has provided
adequate reserves for the payment thereof (including penalties and interest),
except that certain tax returns for years ending prior to the merger of Reality
Interactive into the Borrower have not been filed. All such tax returns and
reports accurately reflect in all material respects the taxes for the Companies
for the periods covered thereby. There are no material taxes owing for years
ending prior to the merger of Reality Interactive, Inc. into the Borrower. No
audit of any governmental authority is pending or, to the knowledge of the
Borrower, threatened, and the results of any completed audits are properly
reflected in the financial statements of the Companies.

 

Section
4.9 
  Defaults. The
Companies are not in default under any indenture, mortgage, deed of trust,
agreement or other instrument to which such Company is a party or by which it or
any of its property is bound. 

 

Section
4.10 
  Liabilities
and Litigation. Except
for liabilities incurred in the normal course of business, the Borrower and its
Restricted Subsidiaries have no material (individually or in the aggregate)
liabilities, direct or contingent, except as disclosed in the most recent
financial statements furnished to the Lender, which, if not paid, would have a
Material Adverse Effect. Except as disclosed in the most recent financial
statements furnished to the Lender, there is no litigation, legal or
administrative proceeding, investigation or other action of any nature pending
or, to the knowledge of Borrower, threatened against or affecting the Borrower
or its Restricted Subsidiaries, or any of the assets owned or used by any
Company, which involves the possibility of any judgment or liability not fully
covered by insurance which if adversely determined would have a Material Adverse
Effect. Without limiting the foregoing, on the Closing Date there is no
litigation, legal or administrative proceeding, investigation or other action
pending or, to the knowledge of Borrower, threatened against or affecting the
Borrower or any Restricted Subsidiary involving non-compliance by the Borrower
or any Restricted Subsidiary or its respective properties with any Applicable
Environmental Laws (as defined in Section
4.17).

 

 

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Section
4.11 
  Margin
Stock. None of
the Loan proceeds will be used for the purpose of, and the Borrower is not
engaged in the business of extending credit for the purpose of, purchasing or
carrying any “margin stock” as defined in Regulation U of the Board of Governors
of the Federal Reserve System (12 C.F.R. Part 221), or for the purpose of
reducing or retiring any indebtedness which was originally incurred to purchase
or carry a margin stock or for any other purpose which might constitute this
transaction a “purpose credit” within the meaning of said Regulation U. The
Borrower is not engaged principally, or as one of the Borrower’s important
activities, in the business of extending credit for the purpose of purchasing or
carrying margin stocks. Neither the Borrower nor any Person acting on behalf of
the Borrower has taken or will take any action which might cause this Agreement
to violate Regulation U or any other regulation of the Board of Governors of the
Federal Reserve System or to violate the Securities Exchange Act of 1934 or any
rule or regulation thereunder, in each case as now in effect or as the same may
hereinafter be in effect. 

 

Section
4.12 
  Utility
or Investment Company. No
Company is engaged in the generation, transmission, or distribution and sale of
electric power; operation of a local distribution system for the sale of natural
or other gas for domestic, commercial, industrial, or other use; ownership or
operation of a pipeline for the regulated transmission or sale of natural or
other gas, crude oil or petroleum products (except for ownership of interests in
gathering line systems); provision of telephone or telegraph service to others;
production, transmission, or distribution and sale of steam or water; operation
of a railroad; or provision of sewer service to others; or any other activity
which cause such Company to be subject to regulation as a utility. The Borrower
is not an “investment company” within the meaning of the Investment Company Act
of l940, as amended. 

 

Section
4.13 
  Compliance
with the Law. Each
Company (i) is not in violation of any law, judgment, decree, order, ordinance,
or governmental rule or regulation to which such Company or any of its property
is subject; and (ii) has not failed to obtain any license, permit, franchise or
other governmental authorization necessary to the ownership of any of its
property or the conduct of its business; in each case, which violation or
failure is reasonably anticipated would have a Material Adverse Effect.

 

 

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Section
4.14 
  ERISA. The
Borrower is in compliance in all material respects with the applicable
provisions of ERISA, and no “reportable event”, as such term is defined in
Section 4043 of ERISA, has occurred with respect to any Plan of the Borrower.

 

Section
4.15 
  Other
Information. All
factual information prepared by the Company and given to the Lender by the
Borrower pursuant to this Agreement and in connection with the Borrower’s
application for the Loan and the Lender’s commitment letter are accurate and
correct in all material respects. All financial projections given to the Lender
were prepared in good faith based on facts and circumstances existing at the
time of preparation and were believed by the Borrower to be accurate in all
material respects. No factual information furnished by the Borrower to the
Lender in connection with the negotiation of this Agreement contains any
material misstatement of fact or fails to state a material fact or any fact
necessary to make the statement contained therein not materially
misleading.

 

Section
4.16 
  Title
to Collateral.

 

(a) 
  Each
Company has good and marketable title to its Collateral, and the Collateral
Documents create legal, valid and perfected Liens on the Collateral, free of all
Liens except those permitted by this Agreement in Section
6.2.

 

(b) 
  NGS Sub
has, in all material respects with respect to its Collateral, the working
interests and net revenue interests therein as set forth on Exhibit A to the
Mortgage granted to Lender, as reduced by the interest assigned to James Jones
in Subsection 4.16 (d) below. Without limiting the foregoing sentence, all of
the proved reserves (whether producing or not, and whether proved developed or
proved undeveloped) included in the reserve reports covering NGS Sub’s
properties in Richland and LaSalle Parishes, Louisiana (by W.D. Von Gonten &
Co. dated September 15, 2004 and October 7, 2004, each effective as of July 1,
2004) are encumbered Collateral in favor of the Lender properly described in the
Collateral Documents. Except as otherwise specifically disclosed to the Lender
in writing with respect to any particular part of NGS Sub’s properties, (i) NGS
Sub is not obligated, whether by virtue of any payment under any contract
providing for the sale by such Company of hydrocarbons which contains a “take or
pay” clause or under any similar arrangement or by virtue of any production
payment or otherwise, to deliver hydrocarbons produced or to be produced from
NGS Sub’s properties at any time after the Closing Date without then or
thereafter receiving full payment therefor, except for Permitted Hedge
Agreements; (ii) none of NGS Sub’s 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; (iii)
none of NGS Sub’s properties is subject to an arrangement or agreement under
which any purchaser or other Person is currently entitled to “make-up” or
otherwise receive material deliveries of hydrocarbons at any time after the
Closing Date without paying at such time the full contract price therefor; and
(iv) no Person is currently entitled to receive any material portion of the
interest of NGS Sub in any hydrocarbons or to receive cash or other payments
from NGS Sub to “balance” any disproportionate allocation of hydrocarbons under
any operating agreement, cash balancing and storage agreement, gas processing or
dehydration agreement, or other similar agreements. For purposes of this
paragraph, “material” shall mean ten thousand ($10,000.00) dollars (or more) or
an amount of property with an equivalent value.

 

 

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Loan Agreement 

(c) 
  As of the
Closing Date, none of the Collateral is subject to any calls on production of
hydrocarbons or any gathering or transportation dedications or commitments of
any kind. 

 

(d) 
  As of the
Closing Date, none of the Collateral is subject to any contractual commitment,
right or option for any Person to acquire any working interest, revenue right,
royalty or other interest therein, except that the Borrower’s contract
superintendent, James Jones, is entitled (as a fee for originating the
transaction, conducting the environmental assessment without cash charge and
overseeing the daily field operations) to be assigned a 5% working interest,
proportionately reduced to NGS Sub’s purchased interest, in both the Tullos I
and the Tullos II properties, after payout of NGS Sub’s purchase costs and
capital expenditures. 

 

(e) 
  As of the
Closing Date, the Borrower itself owns no material assets other than the stock
of NGS Delaware, and cash and short-term investments. As of the Closing Date,
NGS Delaware owns no assets other than the stock of NGS Sub, miscellaneous
office furniture and equipment.

 

(f) 
  As of the
Closing Date, Verdisys, Inc. does not own or have any entitlement to acquire
from any Company any net profits or other future or contingent interest in any
of the Collateral.

 

Section
4.17 
  Environmental
Matters. No
friable asbestos, or any substance containing asbestos deemed hazardous by
federal or state regulations on the date of this Agreement, has been installed
in any Collateral constituting immovable property. where the installation could
be expected to have a Material Adverse Effect. Such immovable property and the
Companies are not in violation of or subject to any existing, pending, or, to
the Borrower’s knowledge threatened investigation or inquiry by any governmental
authority or to any remedial obligations under any applicable laws pertaining to
health or the environment (hereinafter sometimes collectively called “Applicable
Environmental Laws”), including without limitation the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended by
the Superfund Amendments and Reauthorization Act of 1986 (as amended,
hereinafter called “CERCLA”), the Resource Conservation and Recovery Act of
1976, as amended by the Used Oil Recycling Act of 1980, the Solid Waste Disposal
Act Amendments of 1980, and the Hazardous and Solid Waste Amendments of 1984 (as
amended, hereinafter called “RCRA”), except where the failure to do so would not
have a Material Adverse Effect, and this representation and warranty would
continue to be true and correct following disclosure to the applicable
governmental authorities of all relevant facts, conditions and circumstances, if
any, pertaining to such property and known to the Borrower, except where the
failure to do so would not have a Material Adverse Effect. No hazardous
substances or solid wastes have been disposed of or otherwise released on or to
such property, except where the existence would not have a Material Adverse
Effect. The terms “hazardous substance” and “release” as used in this Agreement
shall have the meanings specified in CERCLA, and the terms “solid waste” and
“disposal” (or “disposed”) shall have the meanings specified in RCRA; provided,
in the event that the laws of any applicable state establish a meaning for
“hazardous substance,” “release,” “solid waste,” or “disposal” which is broader
than that specified in either CERCLA or RCRA, such broader meaning shall
apply.

 

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Loan Agreement 

 

Section
4.18 
  Governmental
Requirements. Any
Collateral constituting immovable property is in compliance with all current
governmental requirements affecting such property, including, without
limitation, all current coastal zone protection, zoning and land use
regulations, building codes and all restrictions and requirements imposed by
applicable governmental authorities with respect to the construction of any
improvements on such property and the contemplated use of such property, except
where the failure to do so would not have a Material Adverse
Effect.

 

Section
4.19 
  Contracts. The
Contracts when considered as a whole do not materially affect the rights,
benefits or security of the Lender under the Collateral Documents and the
Contracts do not contain any provision which would prevent in all material
respects the Lender’s practical realization of the benefits of the Collateral
Documents as to the Collateral. After giving effect to the Contracts, the net
revenue interests of each Company in the Collateral are not less than those set
forth in the Collateral Documents.

 

Section
4.20 
  Affiliates.

 

(a) 
  On the
Closing Date, the Borrower has no Subsidiaries, directly or indirectly, other
than NGS Delaware, NGS Sub, Arkla, and Four Star. On the Closing Date, none of
the Companies has an ownership (direct or beneficial) interest in any Person
(whether stock, partnership interest, membership interest or otherwise) other
than as stated in
the preceding sentence. The Borrower directly or indirectly owns and controls
100% of the ownership and voting rights in NGS Delaware, NGS Sub, Arkla and Four
Star. The Borrower has furnished to the Lender true, accurate and complete
copies of the organizational documents (articles of incorporation, bylaws, or
operating agreement, as applicable) of the Companies.

 

(b) 
  None of
the Collateral is owned by, or has record title to it in the name of, another
Person other than Borrower or NGS Sub, and as to the life insurance,
Herlin.

 

Section
4.21 
  Debt
and Preferred Stock.

 

(a) 
  On the
Closing Date, the Borrower has no material Debt for borrowed money from any
Person (other than this new Loan), except for Debt listed on Schedule
4.21. There
are no filed or perfected (i) mortgages, (ii) security interests or (iii) other
Liens securing any of the Debt listed on Schedule
4.21.

 

(b) 
  On the
Closing Date, the Borrower has no preferred stock issued or
outstanding.

 

Section
4.22 
  Patriot
Act. To the
extent applicable, each Company is in compliance, in all material respects, with
the (i) federal Trading with the Enemy Act, as amended, and each of the foreign
assets control regulations of the United States Treasury Department (31 CFR,
Subtitle B, Chapter V, as amended) and any other enabling legislation or
executive order relating thereto, and (ii) Federal Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism (USA Patriot Act of 2001) (the “Patriot
Act”). No
part of the proceeds of any Loan will be used, directly or indirectly, for any
payments to any governmental official or employee, political party, official of
a political party, candidate for office or any one use acting in an official
capacity, in order to obtain, retain or direct business or obtain any improper
advantage, in violation of the United States Foreign Corrupt Practices Act of
1977, as amended.

 

 

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Loan Agreement 

ARTICLE
5

 

AFFIRMATIVE
COVENANTS

 

Unless
the Lender’s prior written consent to the contrary is obtained, the Borrower
will at all times comply with the covenants contained in this Article 5
(including, where applicable without the necessity of expressly so stating in
each instance, causing its Restricted Subsidiaries to comply with such
covenant), from the date hereof and for so long as any part of the Indebtedness
is outstanding. 

 

Section
5.1 
  Performance
of Obligations. The
Borrower will repay the Indebtedness according to the terms of the Note and this
Agreement. Each Company will do and perform every act required of it by this
Agreement, the Note or in the Collateral Documents and the Warrants at the time
or times and in the manner specified. 

 

Section
5.2 
  Financial
Statements and Reports. The
Borrower will furnish or cause to be furnished to the Lender from time to time:

 

	 	(a)	Borrower’s
      Annual Reports -
      (i) upon filing with the SEC, copies of the Borrower’s Annual Report on
      Form 10KSB or, (ii) if Borrower is no longer required to file such
      reports, within 90 days after the close of each fiscal year of the
      Borrower, the audited consolidated balance sheet of the Borrower as of the
      end of such year, the audited consolidated statement of income of the
      Borrower for such year, the audited consolidated statement of shareholder
      equity of the Borrower for such year, and the audited consolidated
      statement of cash flow of Borrower for such year, setting forth in each
      case in comparative form the corresponding figures for the preceding
      fiscal year, accompanied by a report of the Borrower’s independent
      certified public accountants which accountants shall be reasonably
      acceptable to Lender (it being agreed that Borrower’s existing accountants
      and any subsequent firm registered with the public company accounting
      oversight board are acceptable to Lender).

	 	(b)	Borrower’s
      Quarterly Reports -
      (i) upon filing with the SEC, copies of the Borrower’s Quarterly Report on
      Form 10QSB or, (ii) if Borrower is no longer required to file such
      reports, within 45 days after the end of each quarter (other than the
      fourth fiscal quarter), the unaudited consolidated balance sheet of the
      Borrower as of the end of such quarter, the unaudited consolidated
      statement of income of the Borrower for the period from the beginning of
      the fiscal year to the close of such fiscal quarter, the unaudited
      consolidated statement of shareholder equity of the Borrower for the
      period from the beginning of the fiscal year to the close of such fiscal
      quarter, and the unaudited consolidated statement of cash flow of Borrower
      for such fiscal quarter and for the period from the beginning of the
      fiscal year to the close of such fiscal quarter, setting forth in each
      case in comparative form the corresponding figures for the corresponding
      period of the preceding fiscal year (and showing without limitation any
      over or under produced imbalances of production). Such internally prepared
      quarterly reports at the end of each fiscal quarter shall be accompanied
      by the certificates of compliance required by Section
      5.3.

 

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	 	(c)	Annual
      Engineering Report
      -as soon as available and in any event within 60 days following the end of
      each fiscal year commencing 2005, an annual independent third party
      engineering report covering the Borrowing Base / Collateral properties,
      with an effective date no earlier than 60 days preceding, in form and
      substance reasonably acceptable to the Lender prepared by the independent
      petroleum engineering firm utilized by the Borrower for its SEC filings
      and reasonably acceptable to the Lender (it being agreed that the firm
      used by the Borrower for the last such report is acceptable to Lender).
      Without limiting the foregoing sentence, such report shall include a
      discussion of assumptions as to engineering, pricing (which shall be
      consistent with the pricing described in the definition of Borrowing Base)
      and expenses, and an economic evaluation together with the reserve value
      of each well of each property in the Borrowing Base, and further
      categorized as Proved Developed Producing Reserves, Proved Developed
      Non-Producing Reserves, or Proved Undeveloped
Reserves.

	 	(d)	Quarterly
      Reports -
      within 45 days after the end of each fiscal quarter, a quarterly
      production tracking report pertaining to the Borrowing Base properties on
      a field basis or on a well-by-well basis for new wells drilled, in form
      reasonably acceptable to the Lender, including production volumes and
      revenue and expense statements.

	 	(e)	Periodic
      Title Information -
      periodically as available and in any event no later than the date for the
      delivery of the annual independent engineering report, copies of drill
      site title opinions or division order title opinions covering newly
      drilled wells included in the Collateral that are not covered by title
      opinions previously delivered to the Lender (i.e., wells drilled within
      the preceding year); and in addition promptly upon the Lender’s request,
      detailed information concerning any and all requirements or exceptions set
      forth in any title opinions concerning any of the
Collateral.

	 	(f)	Environmental -
      (I) promptly upon receipt thereof, documentation in its possession
      pertaining to any fines levied during the prior year against the Borrower,
      or to the extent known and available to the Borrower against an operator
      of any Collateral, for non-compliance with all applicable federal, state
      and local environmental laws and regulations; and (II) promptly upon
      learning thereof, notice of Borrower’s acquisition of actual knowledge of
      the presence of any hazardous materials or solid waste (as defined
      elsewhere in this Agreement) on or under any Collateral; except in each
      case, however, where the results of which would not have a Material
      Adverse Effect.

 

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	 	(g)	Notices -
      when required by the terms thereof, the notices required under
      Section
      5.11.

	 	(h)	Audit
      Reports -
      promptly upon receipt thereof, one copy of each report submitted to the
      Borrower by independent accountants in connection with any annual, interim
      or special audit made by them of the books of the
Borrower.

	 	(i)	Insurance
      Report -
      within 30 days after the end of each fiscal year of the Borrower, an
      annual insurance coverage report detailing Borrower’s insurance
      program.

	 	(j)	S.E.C.
      Reports -
      promptly notify Lender, upon such information becoming publicly available,
      (i) that periodic or special reports, schedules and other material have
      been filed with or delivered to the Securities and Exchange Commission (or
      any other governmental authority succeeding to the functions thereof) by
      the Borrower and (ii) material public news releases and annual reports
      relating to the Borrower (provided that in no event shall the failure of
      the Borrower to provide the Lender with notice of the public filing of a
      report in and of itself constitute an Event of
Default).

	 	(k)	Hedging
      Agreements -
      promptly after entering into such contract if requested by the Lender but
      in any event on a quarterly basis, a list of all Hedging Agreements of the
      Borrower and its Subsidiaries describing the material terms thereof made
      pursuant to the Hedging Program or otherwise.

	 	(l)	Budgets
      and Other Information -
      for informational purposes only, promptly after adoption thereof, all
      regular budgets, and upon the request of the Lender, such other financial,
      technical or other information regarding the business and affairs and
      financial condition of the Borrower as the Lender may reasonably request.
      

All
balance sheets and other financial reports referred to above shall be in such
detail as the Lender may reasonably request and shall conform to the standards
described in Section
1.3.

 

Section
5.3 
  Certificate
of Compliance.

 

(a) 
   So long
as not contrary to the then current rules, regulations or recommendations of the
American Institute of Certified Public Accountants or similar body or to any
internal policy of the Borrower’s independent certified public accountants,
concurrently with the furnishing of the annual financial statements described
above, the Borrower will cause to be furnished to the Lender a certificate from
the independent certified public accountants for the Borrower stating that in
the ordinary course of their audit of the Borrower, insofar as it relates to
accounting matters, their audit has not disclosed the existence of any condition
which constitutes a Default, or if their audit has disclosed the existence of
any such condition, specifying the nature, period of existence and status
thereof; provided,
however, that the independent certified public accountants shall not be liable
to the Lender for their failure to discover a Default. 

 

 

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(b) 
  Concurrently
with the furnishing of the annual and quarterly financial statements described
above, the Borrower will furnish to the Lender a certificate signed by the
principal financial officer of the Borrower, stating either that no Default
occurred during such quarter (or if it did but no longer exists, the nature and
duration thereof) and that no Default then exists, or if a Default exists, the
nature, period of existence and status thereof, and specifically setting forth
the calculations showing the Borrower’s compliance with the financial covenants
in Section 5.15.

 

Section
5.4 
  Taxes
and Other Liens. Each
Company will file all tax returns and reports required to be filed and pay (or
cause to be paid) and discharge promptly when due, or alternatively have filed
an extension for payment thereof, all taxes, assessments and governmental
charges or levies imposed upon it or upon income or upon any of its property
(including production, severance, windfall profit, excise and other taxes
assessed against or measured by the production of, or the value or proceeds of
production of, the Collateral) as well as all claims of any kind (including
claims for labor, materials, supplies and rent) which, if unpaid, might become a
material Lien upon any or all of its property; provided, however, such Company
shall not be required to pay or cause to be paid any such tax, assessment,
charge, levy or claim if the amount, applicability or validity thereof shall
currently be contested in good faith by appropriate proceedings diligently
conducted and if the contesting party shall have set up reserves therefor
adequate under generally accepted accounting principles (provided that such
reserves may be set up under generally accepted accounting principles) and so
long as the payment of same is not a condition to be met in order to maintain an
oil, gas or mineral lease in force. Notwithstanding the foregoing the Lender
agrees and acknowledges that the tax returns for the Borrower for certain prior
years have not yet been filed, as set forth in Section
4.8.

 

Section
5.5 
  Maintenance
and Compliance. The
Borrower will, and will cause each Restricted Subsidiary to, (i) maintain its
corporate or partnership existence and rights and its current business
operations; (ii) observe and comply (to the extent necessary so that any failure
will not materially and adversely affect the business of such Person) with all
valid existing and future laws, statutes, codes, acts, ordinances, orders,
judgments, decrees, injunctions, rules, regulations, certificates, franchises,
permits, licenses, authorizations, directions and requirements (including
without limitation applicable statutes, regulations, orders and restrictions
relating to environmental standards or controls or to energy regulations) of all
federal, state, county, municipal and other governments, departments,
commissions, boards, courts, authorities, officials and officers, domestic or
foreign; and (iii) maintain its properties (and any property leased by or
consigned to it or held under title retention or conditional sales contracts) in
generally good and workable condition at all times and make all repairs,
replacements, additions, betterments and improvements to its properties to the
extent necessary; in each case however, except where the failure of which would
not cause a Material Adverse Effect.

 

 

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Section
5.6 
  Further
Assurances. Each
Company at its expense will promptly (and in no event later than 30 days after
written notice from the Lender is received) cure any defects, errors or
omissions in the creation, execution, delivery or contents of this Agreement,
the Note or the Collateral Documents, and execute and deliver (or cause to be
executed and delivered) to the Lender upon Lender’s reasonable request all such
other and further documents, agreements and instruments in compliance with or
accomplishment of the covenants and agreements of the Companies in this
Agreement, the Note or in the Collateral Documents and the Warrants or to
further evidence and more fully describe the Collateral (including without
limitation any renewals, additions, substitutions, replacements or accessions to
the Collateral), or to correct any omissions in the Collateral Documents and the
Warrants, or more fully state the security obligations set out herein or in any
of the Collateral Documents, or to perfect, protect or preserve any Liens and
the priority thereof created pursuant to any of the Collateral Documents, or to
make any recordings, to file any notices, or obtain any consents as may be
necessary or appropriate in connection with the transactions contemplated by
this Agreement.

 

Section
5.7 
  Reimbursement
of Expenses. The
Borrower will pay all reasonable legal fees and expenses incurred by the Lender
in connection with the preparation or administration of this Agreement, the Note
and the Collateral Documents, the Warrants and the Revocable Warrants. Legal
fees through January 28, 2005, in connection with preparation of the documents
will not exceed $45,000.00. Borrower acknowledges that additional post closing
legal work regarding legal opinions and title opinions for the initial Loan
Advance remains to be done, which legal fees for such work will not exceed
$6,000.00, provided such matters are completed by January 31. Future legal
work in connection with other post closing items (such as the life insurance
pledge) or the administration of the Loan, future Defaults, added Collateral or
otherwise are not covered by the preceding two sentences. Solely upon and during
the continuance of an Event of Default, the Borrower will, upon request promptly
reimburse the Lender for all amounts expended, advanced or incurred by the
Lender to satisfy any obligation of any Company under this Agreement, or to
protect the property or business of any Company or to collect the Indebtedness,
or to enforce the rights of the Lender under this Agreement or the Note or the
Collateral Documents or the Warrants, which amounts will include all court
costs, reasonable attorneys’ fees and expenses, fees and expenses of engineers,
auditors and accountants, travel expenses and investigation expenses reasonably
incurred by the Lender in connection with any such matters, together with
interest at the Default Rate on each such amount from the date that the same
paid by the Lender (and after written notification to Borrower for request of
payment) until the date of reimbursement to the Lender. The Borrower also agrees
to pay, and to hold the Lender harmless from any failure or delay in paying, all
recording taxes, documentary stamp taxes or other similar taxes, if any, which
may be payable or determined to be payable in connection with the execution and
delivery of this Agreement, the Note, the Collateral Documents, or any
modification or supplement thereof or thereto.

 

Section
5.8 
  Insurance. Each
Company will maintain with financially sound and reputable insurers, insurance
with respect to its properties and businesses against such liabilities,
casualties, risks and contingencies and in such types and amounts as are
customary in accordance with standard industry practice or as more specifically
provided in the Collateral Documents. Upon request of the Lender, the Borrower
will furnish the Lender original certificates of insurance and/or copies of the
applicable policies.

 

 

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Loan Agreement 

Section
5.9 
  Accounts
and Records. The
Borrower will keep books of record and accounts in which true and correct
entries will be made as to all material matters of all dealings or transactions
in relation to the Companies’ business and activities. 

 

Section
5.10 
  Right
of Inspection. The
Borrower will permit any officer, employee or agent of the Lender at Lender’s
sole risk and expense to visit and inspect any of the properties of the
Companies, examine the books of record and accounts of the Companies, take
copies and extracts therefrom, and discuss the affairs, finances and accounts of
the Companies with the Borrower’s officers, accountants and auditors, and the
Borrower will furnish information in its possession concerning the Collateral,
including schedules of all internal and third party information identifying the
Collateral (such as, for example, lease and well names and numbers assigned by
the Borrower or the operator of any mineral properties, division orders and
payment names and numbers assigned by purchasers of the hydrocarbons, and
internal identification names and numbers used by the Borrower in accounting for
revenues, costs and joint interest transactions attributable to the mineral
properties), all on reasonable notice, at such reasonable times without
hindrance or delay and as often as the Lender may reasonably desire, provided
that such visit is not unreasonably burdensome on the Borrower. Notwithstanding
the foregoing, such visits to Borrower’s office shall be limited to one per
calendar month, so long as an Event of Default has not occurred and is not
continuing. The Borrower will furnish to the Lender promptly upon request and in
the form and content specified by the Lender lists of purchasers of hydrocarbons
and other account debtors, schedules of equipment and other data concerning the
Collateral as the Lender may from time to time specify.

 

Section
5.11 
  Notice
of Certain Events.

 

(a) 
  The
Borrower shall promptly notify the Lender if the Borrower learns of the
occurrence of any event which constitutes a Default, together with a detailed
statement by a responsible officer of the Borrower of the steps being taken to
cure the effect of such Default.

 

(b) 
  The
Borrower shall promptly notify the Lender of any change in location of any
Company’s principal place of business or the office where it keeps its records
concerning accounts and contract rights or a change in its name, state of
organization, federal taxpayer identification number or organizational status.

 

(c) 
  The
Borrower shall promptly notify the Lender of the arising of any litigation or
dispute threatened against or affecting the Borrower or any Restricted
Subsidiary which, if adversely determined, would have a Material Adverse Effect.
So long as an Event of Default has occurred and is continuing, the Lender may
(but shall not be obligated to), (i) without prior notice to Borrower, commence,
appear in, or defend any action or proceeding purporting to affect the Loan, or
the respective rights and obligations of Lender and Borrower pursuant to this
Agreement, and (ii) pay all necessary expenses, including reasonable attorneys’
fees and expenses incurred in connection with such proceedings or actions, which
Borrower agrees to repay to Lender upon demand.

 

(d) 
  The
Borrower shall promptly notify the Lender of the occurrence of any material
adverse change of which it becomes aware in the value of any oil or gas property
which is included in the Borrowing Base, or from which any Company otherwise
derives material revenue. Without limiting the foregoing, the Borrower shall
promptly notify the Lender of any notice of default or cancellation from any
lessor of any material mineral lease in the Collateral.

 

 

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Loan Agreement 

(e) 
  The
Borrower shall promptly notify the Lender of the creation, incurrence,
assumption, existence or filing of any material Lien on any Borrowing Base
property now owned or hereafter acquired, except for Liens permitted under
Section
6.2.

 

(f) 
  The
Borrower shall promptly notify the Lender of each creation, acquisition,
disposition, dissolution, merger or addition or removal of any Subsidiary
(whether Restricted Subsidiary or Unrestricted Subsidiary).

 

(g) 
  The
Borrower shall promptly notify the Lender of the execution of each employment
contract with any officer of the Borrower, and shall provide the Lender with a
complete copy thereof.

 

The
foregoing requirements of notice shall not be construed to imply permission or
consent by the Lender as to such events or to waive any representations,
covenants and defaults set forth in this Agreement.

 

Section
5.12 
  ERISA
Information and Compliance. The
Borrower will promptly furnish to the Lender (i) promptly after the filing
thereof with the United States Secretary of Labor or the Pension Benefit
Guaranty Corporation, copies of each annual and other report with respect to
each Plan or any trust created by the Borrower, and (ii) promptly upon becoming
aware of the occurrence of any “reportable event,” as such term is defined in
Section 4043 of ERISA, or of any “prohibited transaction,” as such term is
defined in Section 4975 of the Code, in connection with any Plan or any trust
created by the Borrower, a written notice signed by the president or the
principal financial officer of the Borrower specifying the nature thereof, what
action the Borrower is taking or proposes to take with respect thereto, and,
when known, any action taken by the Internal Revenue Service with respect
thereto. The Borrower will comply with all of the applicable funding and other
requirements of ERISA as such requirements relate to the Plans of the
Borrower.

 

Section
5.13 
  Indemnification.

 

(a) 
  The
Borrower will indemnify the Lender and hold the Lender harmless from claims of
brokers with whom the Borrower has contracted in the execution hereof or the
consummation of the transactions contemplated hereby. The Lender will indemnify
the Borrower and hold the Borrower harmless from claims of brokers with whom the
Lender has contracted in connection with the transactions contemplated
hereby.

 

(b) 
  The
Borrower will indemnify the Lender and hold the Lender harmless from any and all
liabilities, obligations, losses, damages, penalties, claims, actions, suits,
costs and expenses of whatever kind or nature which may be imposed on, incurred
by or asserted at any time against the Lender in any way relating to, or arising
in connection with, the use or occupancy of any of the Collateral as a result of
any breach of any representation, warranty or covenant by Borrower or any
Restricted Subsidiary under the terms of this Agreement or the Collateral
Documents.

 

 

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Section
5.14 
  Environmental
Indemnity. The
Borrower shall defend, indemnify and hold Lender and its directors, officers,
agents and employees harmless from and against all claims, demands, causes of
action, liabilities, losses, costs and expenses (including, without limitation,
costs of suit, reasonable attorneys’ fees and fees of expert witnesses) arising
from or in connection with (i) the presence on or under all Collateral
constituting real (immovable) property of any hazardous substances or solid
wastes (as defined elsewhere in this Agreement), or any releases or discharges
of any hazardous substances or solid wastes on, under or from such property, or
(ii) any activity carried on or undertaken on or off such property, whether
prior to or during the term of this Agreement, and whether by Borrower or its
Subsidiary or any predecessor in title or any officers, employees, agents,
contractors or subcontractors of Borrower or any Subsidiary or any predecessor
in title, or any third persons at any time occupying or present on such
property, in connection with the handling, use, generation, manufacture,
treatment, removal, storage, decontamination, clean-up, transport or disposal of
any hazardous substances or solid wastes at any time located or present on or
under such property. The foregoing indemnity shall further apply to any residual
contamination on or under such property, or affecting any natural resources, and
to any contamination of any property or natural resources arising in connection
with the generation, use, handling, storage, transport or disposal of any such
hazardous substances or solid wastes, and irrespective of whether any of such
activities were or will be undertaken in accordance with applicable laws,
regulations, codes and ordinances. Without prejudice to the survival of any
other agreements of the Borrower hereunder, the provisions of this Section shall
survive the final payment of all Indebtedness and the termination of this
Agreement and shall continue thereafter in full force and effect.

 

Section
5.15 
  Financial
Covenants. The
Borrower shall comply with the following financial covenants (determined in
accordance with Section
1.3 and on a
consolidated basis with its Restricted Subsidiaries), except as specifically
stated otherwise:

 

	 	(a)	Minimum
      Collateral Ratio.
      The Borrower and its Restricted Subsidiaries, on a consolidated basis,
      shall maintain a ratio of the Borrowing Base to Total Debt of not less
      than 1.50 to 1.00 as of the date of each quarterly report of the Borrower.
      

	 	(b)	Minimum
      EBITDA to Interest Expense.
      The Borrower and its Restricted Subsidiaries, on a consolidated basis,
      shall maintain a ratio of EBITDA for the most recently completed fiscal
      quarter to Interest Expense on Total Debt during such quarter of not less
      than 2.00 to 1.00 (the “Interest Coverage Ratio”) as of the date of each
      quarterly report of the Borrower, commencing with the report for the
      quarter ended September 30, 2005.

Notwithstanding
the foregoing, in the event that the Interest Coverage Ratio is not met for any
fiscal quarter, the Borrower shall not be deemed to be in breach of Section
5.15(b) if the Interest Coverage Ratio is met for the three month period ended
as of the end of the first month immediately following the end of such fiscal
quarter.

 

 

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Section
5.16 
  DSR
Account.

 

(a) 
  The
Borrower shall establish on the Closing Date and thereafter maintain a debt
service reserve account (the “DSR
Account”) at
AmSouth Bank or at such bank or other financial institution reasonably
satisfactory to the Lender, which shall be under the control of the Lender and
subject to access and withdrawal by the Lender only in accordance with the terms
of this Agreement. The Borrower shall fund the DSR Account on the Closing Date
with an amount no less than 7.5% of the Initial Advance (i.e., if the initial
Advance is $3,000,000.00, then $225,000.00). From the Closing Date through
September 30, 2005, the Borrower shall maintain (and replenish as needed) at all
times funds in the DSR Account equal to or exceeding 7.5% of the outstanding
principal balance of the Loan at any time and from time to time; commencing on
October 1, 2005, the Borrower shall maintain (and replenish as needed) at all
times funds in the DSR Account equal to or exceeding five (5%) percent of the
outstanding principal balance of the Loan at any time and from time to time. In
the event that the DSR Account becomes under-funded, the Borrower shall within
ten (10) days replenish the DSR Account to the required amount from any and all
(i) free cash flow, defined as any operating cash flow net of required payments
on the Loan, (ii) the proceeds from any offering of securities or other
financing event by any of the Companies, and (iii) any sources of cash. Upon the
occurrence of an Event of Default, the Lender, at its option, may withdraw funds
from the DSR Account to pay any interest or principal of the Indebtedness then
due.

 

(b) 
  The
Borrower hereby grants to the Lender a continuing security interest in the DSR
Account as security for the Indebtedness, and all funds, investment property and
proceeds pertaining thereto.

 

(c) 
  Notwithstanding
the terms of Section
5.16(a) above,
if Borrower and its Subsidiaries, on a consolidated basis, have not achieved an
EBITDA of at least $70,000.00 per month for two consecutive calendar months (the
“DSR Test”), commencing with the two months ended April 30, 2005, then Borrower
shall fund the DSR Account with a total amount not less than fourteen (14%)
percent (the “DSR Penalty Rate”) of the outstanding principal balance of the
Loan no later than the forty fifth (45th) day
following the end of the two month period where the DSR Test was applied. The
DSR Penalty Rate shall thereafter remain in effect until Borrower achieves the
DSR Test, at which point the terms (7.5% or 5%) described in Section
5.16(a) above
shall apply; provided, however, that if Borrower meets the DSR Test for April
2005, but not March 2005, the Borrower shall be allowed the month of May 2005 to
meet the DSR Test before the DSR Penalty Rate shall apply. Once the DSR Test has
been met by the Borrower, the DSR Test shall not apply to any future periods and
this Section 5.16(c) shall no longer apply. For clarification, if on June 14,
2005, the Borrower determines that it has not passed the DSR Test for the months
of March and April 2005, then Borrower shall increase the amount in the DSR
Account from 7.5% to the DSR Penalty Rate (14%) until the Borrower meets the DSR
Test. If the Borrower has $70,000.00 of EBITDA for the month of April 2005, then
the DSR Penalty shall not apply unless Borrower fails to have $70,000.00 of
EBITDA for May 2005.

 

Section
5.17 
  Life
Insurance. The
Borrower shall cause the life insurance required by Section
3.1(ii) to be
issued and a first priority Lien thereon to be perfected in favor of Lender on
or before April 30, 2005. Notwithstanding the foregoing or any other provision
in this Agreement to the contrary, the Borrower shall not be deemed to be in
breach of this Section 5.17 covenant and its obligation to obtain such life
insurance shall be permanently waived if both (i) such life insurance is denied
by at least three providers as a result of the un-insurability of Herlin and
(ii) on or before April 30, 2005, the Borrower has entered into an employment
agreement with an individual reasonably acceptable to the Lender to serve as the
Borrower’s full time Vice President of Operations.

 

 

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Section
5.18 
  Hedging
Program. The
Borrower shall implement a Hedging Program as described below no later than
February 28, 2005, and maintain such Hedging Program until the later of (i) the
Maturity Date and (ii) the date at which Lender has been repaid in full
including all Interest Expense, fees and Prepayment Premiums, if any, associated
with the Loan. The Hedging Program will encompass the purchase of swaps,
costless collars or comparable hedging instruments that have the effect of
eliminating pricing risk on fifty (50%) percent of Net Production for at least a
two year period from the implementation of that Hedging Program. Borrower will
review and update the Hedging Program on at least a monthly such that the
Hedging Program continues to address two years of forward production. The
Hedging Program shall at all times be subject to the Lender’s approval, which
approval will not be unreasonably withheld.

 

Section
5.19 
  Future
Collateral.

 

(a) 
  The
Lender shall have the right to receive a first priority mortgage, security
interest or assignment in the case where Borrower or any Subsidiary acquires new
assets with Advances under the Loan, as provided in Section
3.1, subject
to the provisions of Section
2.12.

 

(b) 
  The
Lender shall have the right to receive a guaranty from each newly acquired or
created Restricted Subsidiary, as provided in Section
3.1.

 

Section
5.20 
  Post
Closing Obligations.

 

(a) 
  The
Borrower will furnish the Lender with updated Limited Title Opinions on or
before ten (10) Business Days after the Closing Date on the Collateral, updating
title through and confirming the recordation of the Lender’s Mortgage
and confirming the absence of other mortgages, liens or judgments affecting
title to the Collateral.

 

(b) 
  The
Borrower agrees to use commercially reasonable efforts to obtain an amendment to
the Act of Sale and Assignment dated September 2, 2004, to NGS Sub of the Tullos
I property as required by the Limited Title Opinion pertaining
thereto.

 

(c) 
  The
Borrower will cause an amendment to the Articles of Organization of Arkla to be
executed and filed with the Louisiana Secretary of State providing that the
membership interest in Arkla is uncertificated, on or before ten (10) Business
Days after the Closing Date.

 

(d) 
  Concurrently
with the filing of the Collateral Documents, the Borrower shall obtain and
record in Winn Parish a certified copy of the assignment of interest in the oil,
gas and mineral leases and conveyance of movable property dated June 21, 1990,
by LTF Limited Partnership to Chadco, Inc., as required by the Preliminary
Limited Title Opinion pertaining to Tullos II.

 

 

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(e) 
  The
Borrower agrees to use commercially appropriate efforts to obtain the consents
to assignment from any lessor of oil and gas leases requiring same in the
Collateral, in those instances where the Borrower and the Lender mutually agree
such consent should be sought, including without limitation the consent of
Annadarko Land Corp. under the Oil and Gas Lease dated February 1, 2003,
pertaining to Tullos II.

 

(f) 
  The
Borrower will execute and record a supplemental mortgage encumbering the mineral
leases underlying the additional eleven (11) wells purchased by the Borrower as
part of the Tullos II acquisition, on or before February 28, 2005.

 

ARTICLE
6

 

NEGATIVE
COVENANTS

 

Unless
the Lender’s prior written consent to the contrary is obtained, the Borrower
will at all times comply with the covenants contained in this Article 6
(including, where applicable without the necessity of expressly so stating in
each instance, causing its Restricted Subsidiaries to comply with such
covenants), from the date hereof and for so long as any part of the Indebtedness
is outstanding. 

 

Section
6.1 
  Debts,
Guaranties and Other Obligations.
Borrower will not, and will not allow or suffer any Restricted Subsidiary to,
incur, create, assume, guaranty or in any manner become or be liable in respect
of any Debt direct or contingent, except for: 

 

	 	(a)	The
      Indebtedness to the Lender. 

	 	(b)	Future
      Senior Debt incurred pursuant to Section
      2.12.

	 	(b)	Endorsements
      of negotiable instruments for deposit or collection, from time to time
      incurred in the ordinary course of business.

	 	(c)	Debt
      under operating agreements, unitization and pooling agreements and orders,
      farmout agreements and gas balancing agreements, in each case that are
      customary in the oil, gas and mineral production business and that are
      entered into in the ordinary course of business.

	 	(d)	Taxes,
      assessments or other government charges, if such reserve as shall be
      required by generally accepted accounting principles shall have been made
      therefor.

 

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	 	(e)	Hedging
      Obligations incurred in the ordinary course of business under Permitted
      Hedge Agreements and under the approved Hedging
Program.

	 	(f)	Debt
      in existence as of the Closing Date described in Section
      4.21.

	 	(g)	Debt
      by any Restricted Subsidiary to any other Restricted Subsidiary or to the
      Borrower or from Borrower to any Restricted Subsidiary; provided, all such
      Debt shall be evidenced by promissory notes copies of which are made
      available to Lender.

	 	(h)	Debt
      constituting (x) purchase money obligations in an aggregate amount not to
      exceed ten million ($10,000,000.00) dollars outstanding at any time (but
      exclusive of Future Senior Debt, which is otherwise permitted by paragraph
      (b) above) and (ii) capital lease obligations in an aggregate amount not
      to exceed one million ($1,000,000.00) dollars outstanding at any time;
      provided,
      that such Debt shall be secured only by the asset acquired in connection
      with the incurrence of such Debt, shall in each incurrence constitute not
      more than ninety (90%) percent of the aggregate consideration paid with
      respect to such asset and shall be incurred prior to or within ten (10)
      days after the acquisition of such asset.

	 	(i)	Debt,
      including without limitation redeemable preferred stock) which is
      subordinated in right of payment to the Loan and evidenced as such by a
      written instrument containing commercially reasonable subordination
      provisions.

	 	(j)	Guaranties
      by Restricted Subsidiaries of Debt of the Borrower or any Restricted
      Subsidiary if the Debt so guaranteed is permitted to be incurred under
      this Agreement.

	 	(k)	Debt
      constituting reimbursement obligations to issuers of letters of credit
      secured by a pledge of cash or cash equivalents.

	 	(l)	Obligations
      under volumetric production payments if the associated reserves are not
      Collateral.

 

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	 	(m)	Debt
      incurred to refinance the then outstanding aggregate principal amount of
      any Debt permitted under this Section 6.1 (including any additional Debt
      incurred to pay premiums and fees in connection therewith); provided that
      such refinancing Debt shall be in an aggregate principal amount not to
      exceed the then outstanding aggregate principal amount of such Debt to be
      refinanced plus any amount incurred to pay premiums and fees in connection
      therewith, shall have an average life no shorter than the Debt being so
      refinanced, and to the extent the Debt refinances Debt subordinated to the
      Indebtedness, such refinanced Debt is subordinated at least to the same
      extent.

Section
6.2 
  Liens. The
Borrower will not, and will not allow or suffer any Restricted Subsidiary to,
create, incur, assume or permit to exist any Lien on any of its property now
owned, except for: 

 

	 	(a)	Liens
      for taxes, assessments, or other governmental charges not yet due or which
      are being contested in good faith by appropriate action promptly initiated
      and diligently conducted, if such reserve as shall be required by
      generally accepted accounting principles shall have been made therefor.
      

	 	(b)	Liens
      of landlords, vendors, carriers, warehousemen, mechanics, laborers and
      materialmen arising by law in the ordinary course of business for sums
      either not more than 90 days past due or being contested in good faith by
      appropriate action promptly initiated and diligently conducted, if such
      reserve as shall be required by generally accepted accounting principles
      shall have been made therefor, and enforcement of such Lien is staged
      pending such contest. 

	 	(c)	Inchoate
      liens arising under ERISA to secure the contingent liability of the
      Borrower permitted by this Agreement.

	 	(d)	The
      pledge of the Collateral and any other Liens in favor of the Lender to
      secure the Indebtedness of the Borrower to the
Lender.

	 	(e)	Minor
      imperfections of title or non-monetary Liens that do not materially impair
      the development, operation or value of property in its intended use or the
      title thereto and which are of a nature commonly existing with respect to
      properties of a similar character as the
Collateral.

 

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	 	(f)	Royalties,
      overriding royalties, net profits interests, production payments,
      reversionary interests, calls on production, preferential purchase rights
      and other burdens on or deductions from the proceeds of production, that
      do not secure Debt for borrowed money and that are taken into account in
      computing the net revenue interests and working interests of the Company
      warranted in the Collateral Documents.

	 	(g)	Operating
      agreements, unitization and pooling agreements and orders, farmout
      agreements, gas balancing agreements and other agreements, in each case
      that are customary in the oil, gas and mineral production business in the
      general area of such portion of such property, and that are entered into
      in the ordinary course of business in good faith.

	 	(h)	Judgment
      Liens arising in the ordinary course of business (provided the claim is
      actively being contested in good faith and by appropriate proceedings) and
      which do not constitute an Event of Default under Section
      8.1(j).

	 	(i)	Liens
      with Lender’s prior written approval securing Permitted Hedge Agreements,
      not to be unreasonably withheld.

	 	(j)	Liens
      securing permitted Future Senior Debt.

	 	(k)	Reserved.
      

	 	(l)	Liens
      on assets or entities acquired after the Closing Date, provided each such
      Lien (i) was in existence prior to such acquisition, (ii) was not created
      in contemplation of such acquisition, (iii) does not extend to any assets
      other than those acquired, and (iv) secures only the Debt that it secures
      on the date of such acquisition.

	 	(m)	Liens
      on equipment and Liens securing capital lease obligations securing Debt
      permitted by Section
      6.1(h),
      provided, that each such Lien is limited to such equipment so acquired and
      secures only the Debt incurred in connection with the acquisition of such
      equipment.

 

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	 	(n)	Liens
      on cash or cash equivalents securing reimbursement obligations in
      connection with letters of credit.

	 	(o)	Liens
      pursuant to paragraph 8 of the Secured Promissory Note dated August 10,
      2004, by the Borrower to Laird Q. Cagan, provided each such Lien (i)
      secures only the Debt in existence as of the Closing Date described in
      Section
      4.21,
      and (ii) is not perfected or otherwise made effective as to third parties
      by any filings or recordings of mortgages, uniform commercial code
      financing statements or other collateral documents of any type. (For the
      avoidance of doubt, this paragraph (o) does not modify or negate the
      representation in Section
      4.21(a)
      above).

 

The
inclusion of this Section
6.2 shall
not constitute in any way an acknowledgment by the Lender of the validity,
legality, enforceability or binding effect on the Lender of such Liens, the sole
purpose of this provision being to provide that the existence of any such
permitted Liens shall not in and of itself constitute an Event of Default under
this Agreement.

 

Section
6.3 
  Investments,
Loans and Advances. The
Borrower will not (directly or indirectly through any Restricted Subsidiary),
and will not allow or suffer any Restricted Subsidiary to, make or permit to
remain outstanding any loans or advances or extensions of credit to, or
purchases or other acquisitions of capital stock or ownership (direct or
beneficial) interests or obligations of, or other investments in, any Person
(including without limitation any Subsidiary), except for: 

 

	 	(a)	Investments
      in cash, cash equivalents, and readily marketable direct obligations of
      the United States of America or any agency thereof.

	 	(b)	Investments
      in certificates of deposit of maturities less than one year issued by
      banks satisfactory to Lender.

	 	(c)	Investments
      in commercial paper of maturities less than one year with the best rating
      by Standard & Poors, Moody’s Investors Service, Inc., or any other
      rating agency reasonably satisfactory to the
Lender.

 

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	 	(d)	Advances
      and loans to employees and officers made in the ordinary course of
      business not exceeding in the aggregate $10,000 for all such advances and
      loans. 

	 	(e)	Advances
      pursuant to operating agreements, unitization and pooling agreements and
      orders, farmout agreements and gas balancing agreements, in each case that
      are customary in the oil, gas and mineral production business and that are
      entered into in the ordinary course of business.

	 	(f)	Ownership
      of equity interests in Restricted Subsidiaries.

	 	(g)	Loans
      and advances made by the Borrower to its Restricted Subsidiaries in the
      ordinary course of business to be used in the normal business operations
      of such Restricted Subsidiary. (However, nothing in this Section modifies
      or overrides the limitation on use of proceeds of the Loan in Section
      2.7.).

	 	(h)	Accounts
      receivables created or acquired in the ordinary course of
    business.

	 	(i)	Investments
      in connection with Permitted Hedging Agreements incurred under the Hedging
      Program approved by the Lender.

	 	(j)	Repurchases
      of non vested options and securities from Herlin pursuant to Herlin’s
      existing founder common stock purchase agreement attached hereto as
      Exhibit
      6.3(j) as
      in effect on the Closing Date (without consideration of any amendments
      thereto made without the Lender’s written consent), solely pursuant to the
      Repurchase Option (as defined therein) under Section 3(a) thereof, but
      excluding other purchases thereunder including without limitation
      purchases under the Right of First Refusal under Section 3(b)
      thereof.

	 	(k)	Investments
      in (x) Unrestricted Subsidiaries or (y) Persons who derive substantial
      revenue from operations similar or ancillary to the Borrower’s business as
      conducted at the time of such Investment, provided that the total
      Investments under this clause (k) shall not exceed the greater of (A)
      $100,000.00 or (B) the total of the aggregate net proceeds from equity
      offerings made after the Closing Date plus proceeds from issuances of
      subordinate Debt made after the Closing Date and outstanding at any one
      time.

 

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Section
6.4 
  Nature
of Business. The
Borrower will not permit any material change to be made in the character of its
business or the business of any Restricted Subsidiary as carried on at the
Closing Date. 

 

Section
6.5 
   Mergers
and Consolidations. The
Borrower will not, and will not allow or suffer any Restricted Subsidiary to,
merge with or consolidate with any Person (whether or not such merger or
consolidation requires any capital expenditures on the part of the Borrower or
such Restricted Subsidiary) without the prior written consent of the Lender, or
except as permitted by this Section. Mergers and consolidations shall be allowed
without Lender’s consent so long as (i) the surviving entity continues to be
engaged in the acquisition and development of oil and gas properties with proved
reserves, (ii) the merger or consolidation does not trigger a Default and is not
projected to trigger a Default for the remaining term of the Loan, and (iii) the
merger does not materially reduce the Collateral associated with the
Loan.

 

Section
6.6 
  ERISA
Compliance. The
Borrower will not at any time permit any Plan maintained by it to engage in any
“prohibited transaction” as such term is defined in Section 4975 of the Code;
incur any “accumulated funding deficiency” as such term is defined in Section
302 of ERISA; or terminate any such Plan in a manner which could result in the
imposition of a Lien on the property of the Borrower pursuant to Section 4068 of
ERISA. 

 

Section
6.7 
  Changes. Each
Company will not without 30 days prior notice to the Lender change the location
of any of its Collateral, or change the location of its state of organization or
chief executive office or change its name or taxpayer identification
number.

 

Section
6.8 
  Sales. The
Borrower will not, and will not allow or suffer any Restricted Subsidiary to,
sell, assign, transfer by bond for deed, lease or otherwise dispose of (whether
in one transaction or in a series of transactions) all or substantially all of
its property (whether now owned or hereafter acquired) to any Person. The
Borrower will not, and will not allow or suffer any Restricted Subsidiary to,
sell, assign, transfer by bond for deed, lease or otherwise dispose of any of
its Collateral or any material portion of its other property, business, or
assets, including without limitation any producing mineral properties, except
for (i) sales of production, (ii) collection of its accounts, (iii) sales of
items of equipment which are obsolete or otherwise no longer useful for such
Person’s operations, in each case in the ordinary course of business, (iv) sales
of assets consisting of lesser amounts of assets than an Asset Sale and the
proceeds of which are paid to Lender as required by Section
2.5(b), and (v)
sales under clause (z) of the definition of Excluded Sales.

 

 

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Section
6.9 
  
Agreements. Each
Company will not enter into or be a party to any contract or agreement for the
purchase of materials, supplies or other property or services if such contract
or agreement shall require that the Company make payment for such materials,
supplies or other property irrespective of whether delivery thereof is made or
whether such services are rendered. Except in the ordinary course of business,
each Company will not enter into any arrangement with any gas pipeline company
or any other purchaser of hydrocarbons regarding the Collateral whereby the
Company agrees that said gas pipeline company or purchaser may set off any claim
against the Company by withholding payment for any hydrocarbons actually
delivered.

 

Section
6.10 
  No
Dividends or Redemption of Shares. The
Borrower will not (i) pay or declare any dividend on any class of its stock
(other than stock dividends), (ii) make any other distribution or other
shareholder expenditure on account of any class of its stock, nor set aside any
funds for such purpose, (iii) otherwise make or agree to pay for or make,
directly or indirectly, any other distribution with respect to any shares of any
class of its stock, or any payment (whether in cash, securities or other
property), including any sinking fund or similar deposit, on account of the
purchase, redemption, retirement, acquisition, cancellation or termination of
any such shares or any option, warrants or other right to acquire any such
shares, nor (iv) make any payments of principal or interest, or any purchase,
redemption, retirement, acquisition or defeasance, with respect to any Debt
which is subordinated in right of payment to the payment of the Indebtedness,
except (A) under the Warrants, (B) in the case of (i) through (iv), if at the
time thereof and immediately after giving effect thereto no Default or Event of
Default shall have occurred and be continuing and all of the Distribution
Conditions defined below are met, and (C) for the costs incurred by the Borrower
on behalf of any shareholder in connection with registering the shares of stock
held by such shareholder. The Borrower may make and pay such cash dividends so
declared within 30 days of such declaration without testing the Distribution
Conditions again under this Section as of the payment date. The “Distribution
Conditions” shall
mean that all of the following shall be true: 

 

	 	(1)	DSR
      Account.
      The DSR Account shall be fully funded as required by Section
      5.16.

 

	 	(2)	Total
      Debt to EBITDA.
      Total Debt as of the last day of the Borrower’s most recently ended fiscal
      quarter, divided by EBITDA for such quarter shall not exceed
    14.00.

 

	 	(3)	Interest
      Coverage.
      EBITDA for the Borrower’s most recently ended fiscal quarter, divided by
      total Interest Expense on Total Debt for such quarter shall be at least
      2.00.

 

	 	(4)	PV10
      Test.
      The Borrowing Base as determined by the most recent independent
      engineering report delivered to the Lender in accordance with this
      Agreement shall not be less than 1.50 times the amount of Total Debt then
      outstanding.

 

	 	(5)	No
      Distributions to Common.
      There shall be no distributions with respect to shares of Borrower’s
      common equity so long as the Loan is outstanding; provided, however, that
      this Section
      6.10(5) is
      not intended to limit dividends, coupon payments or other distributions to
      holders of preferred equity or debt subordinate to that of the Lender so
      long as the provisions of Sections
      6.10(1)-(4)
      are met or to limit the ability of Borrower to acquire shares of its
      equity held by Herlin permitted by Section
      6.3(j).

 

 

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Section
6.11 
  Compensation. The
Borrower will not pay compensation to its employees, officers or directors in
excess of reasonable salaries, bonuses and other benefits that are incurred in
the ordinary course of business and, without limiting the foregoing, are not
paid with the purpose or effect of avoiding the limitation established in
Section
6.10
above.

 

Section
6.12 
  Management. The
Borrower shall use commercially reasonably efforts not to permit or suffer a
change in the key management of the Borrower and its Restricted Subsidiaries to
occur. For purposes of this Section, key management shall mean the continued
active full time employment of Robert S. Herlin (as President) as his primary
and essentially exclusive business activity, excluding his current position on
the board of directors of Boots and Coots Group.

 

Section
6.13 
  Transactions
with Affiliates. The
Borrower will not, and will not allow or suffer any Restricted Subsidiary to,
sell, transfer, lease or otherwise dispose of (including pursuant to any merger)
any property or assets to, or purchase, lease or otherwise acquire (including
pursuant to a merger) any property or assets from, or otherwise engage in any
other transactions with, any Affiliates, except in the ordinary course of
business at prices and on terms and conditions not less favorable to the
Borrower or such Restricted Subsidiary as could be obtained on an arms-length
basis from unrelated third persons in a comparable transaction.

 

Section
6.14 
  Subsidiaries. The
Borrower will not allow or suffer any changes to be made in the ownership
structure of each Restricted Subsidiary, and shall not own and control directly
or indirectly less than one hundred (100%) percent of the ownership and voting
rights in each Restricted Subsidiary. The Borrower will not, and will not allow
or suffer any Restrictive Subsidiary to, create, incur, assume or permit to
exist any Lien on its equity interest in any Restricted Subsidiary, other than
in favor of the Lender.

 

Section
6.15 
  Restrictive
Agreements. The
Borrower will not directly or indirectly enter into, incur or permit to exist,
or permit any Restricted Subsidiary so to do, any agreement or other arrangement
that prohibits, restricts or imposes any condition upon the ability of a
Restricted Subsidiary to create, incur or permit to exist any Lien upon any of
its property or assets or prohibits, restricts or imposes any condition upon the
ability of any Restricted Subsidiary to pay dividends or other distributions
with respect to any shares of its equity securities or other ownership interest
or to repay to the Borrower any loans or advances, provided that the foregoing
shall not apply to restrictions and conditions imposed by corporate law or by
this Agreement.

 

Section
6.16 
  Repayment
of Director Loans. The
Borrower shall not repay any loans to any officers in excess of $50,000.00 in
the aggregate or to any directors other than outside director fees unless the
following conditions are met: 

 

 

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Loan Agreement 

(a)The
Hedging Program provisions of Section
5.18 have
been implemented, with Permitted Hedge Agreements executed and in effect,
and

 

(b)The new
employment contract with Herlin has been approved by the compensation committee
of the Borrower.

 

Section
6.17 
  Subordination. The
Borrower will not pay any management or other fee to Cagan McAfee Capital
Partners or its Affiliates, unless at the time of such payment and immediately
after giving effect thereto no Default or Event of Default shall have occurred
and be continuing.

 

ARTICLE
7

 

 

CONDITIONS
OF LENDING

 

Section
7.1 
  Conditions
of Lending. The
obligation of the Lender to make the Loan is subject to the absence of a Default
or an Event of Default, and to the receipt of the following on or before the
Closing Date:

 

	 	(a)	Agreement. A
      duly executed counterpart of this Agreement signed by all the parties
      hereto.

	 	(b)	Note.
      The duly executed Note signed by the Borrower.

	 	(c)	Good
      Standing.
      Certificates of good standing of the Companies issued by the Secretaries
      of State of Delaware, Texas, Nevada and Louisiana.

	 	(d)	Corporate
      Certificate. A
      certificate of the secretary of each Company (i) setting forth resolutions
      of its board of directors in form and substance reasonably satisfactory to
      the Lender with respect to the unanimous authorization of this Agreement,
      the Note and the Collateral Documents to which it is a party, (ii)
      attaching the articles of incorporation and bylaws of the Company, (iii)
      stating its Federal tax identification number and corporate registration
      identification number, and (iv) setting forth the officers authorized to
      sign such instruments. 

	 	(e)	Fee.
      The commitment fee required by Section
      2.6 to
      be paid from the proceeds of the initial draw.

	 	(f)	Collateral
      Documents.
      Duly executed and recorded mortgages, executed deposit account control
      agreement, and executed security agreements, and filed financing
      statements covering the Collateral, and executed guaranty
    agreement.

 

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	 	(g)	Stock
      Certificates.
      The original stock certificates for its shares in NGS Delaware, NGS Sub
      and Four Star, all duly endorsed in blank and delivered to the
      Lender.

	 	(h)	Lien
      Searches.
      UCC lien searches reasonably satisfactory to the Lender pertaining to the
      Companies.

	 	(i)	Title.
      Title Opinions (limited in time coverage) and certificates of land title
      records run sheets and title documentation with respect to the Collateral
      in form, scope and substance reasonably satisfactory to the Lender and
      Lender’s counsel, which indicate that NGS Sub has good and marketable
      title to the interests in the Collateral in amounts not less than those
      specified in the Collateral Documents or otherwise represented to Lender,
      subject to no Liens other than the Collateral Documents and those accepted
      by the Lender in writing, unless waived by Lender in writing on or in
      advance of the Closing Date.

	 	(j)	Legal
      Opinions.
      Legal opinions from Borrower’s counsel (The Boles Law Firm, and Troy &
      Gould) in form, scope and substance reasonably satisfactory to the
      Lender.

	 	(k)	Insurance.
      Satisfactory evidence of all insurance coverages relating to the
      Collateral and the Companies. 

	 	(l)	Environmental.
      Complete documentation in Borrower’s possession pertaining to any previous
      material fines levied against the Borrower or any current operator of the
      Collateral for non-compliance with applicable federal, state and local
      environmental laws and regulations.

	 	(m)	Warrants.
      Executed Warrant Agreement, Registration Rights Agreement and Revocable
      Warrant Agreement.

 

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	 	(n)	Release.
      Executed and recorded release of Mortgage by Delta Exploration and
      Development Company, Inc., of that certain Mortgage dated September 25,
      2003, covering Delhi.

In the
event that the Lender in its sole and absolute discretion waives the receipt of
any items set forth above, the Borrower agrees that it nonetheless will promptly
deliver such item to the Lender upon request within the time period reasonably
specified by the Lender in connection with such waiver.

 

Section
7.2 
  Certification. The
obligation of the Lender to make the Loan available is further subject to the
certification by the Borrower, which the Borrower hereby makes, that no Default
or Event of Default exists, and that no Material Adverse Effect has occurred,
since the time of the issuance of Lender’s commitment letter.

 

Section
7.3 
  Incurrence
Covenants. The
obligation of the Lender to make an Advance under the Loan is subject to all of
the following conditions being met at the time of such Advance, which may occur
within ninety (90) days after the Closing Date:

 

	 	(a)
      	Each
      of the representations and warranties of the Companies contained in this
      Agreement and the Collateral Documents shall be true and correct in all
      material respects on and as of the date of each subsequent Advance, both
      before and after giving effect to the proposed Advance and to the
      application of the proceeds therefrom, as though made on and as of such
      date, other than any such representations or warranties that by their
      terms refer to a specific date other than the date of the proposed Advance
      or issuance, in which case as of such specific date, and except as such
      representations and warranties relate to matters that are changed as
      permitted by this Agreement.

	 	(b)	At
      the time of such Advance, no Default shall have occurred and be
      continuing.

	 	(c)	The
      Borrower shall not have had a Material Adverse Effect from its condition
      represented in the most recent financial statements furnished to the
      Lender prior to the Closing Date, except to the extent that such changes
      are permitted by this Agreement.

	 	(d)	If
      reasonably required by Lender, Borrower shall deliver to Lender a
      bringdown title search in the appropriate states, confirming the absence
      of Lien filings against the Collateral or the Companies since the
      effective date of the preceding bringdown search.

 

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	 	(e)	Delivery
      of additional Warrants in accordance with Section
      3.2
      and additional Revocable Warrants in accordance with Section
      3.3.

Section
7.4 
  Title
Matters. It is
expressly acknowledged by the Borrower that the waiver by the Borrower (on the
basis of the Borrower’s business judgment) of any title requirements contained
in any title opinions delivered to the Lender from time to time in connection
with this Agreement, or other acceptance of potential title deficiencies, and
funding by the Lender of Advances, shall not constitute a waiver by the Lender
of any of the representations and warranties of the Companies contained herein
or in the Collateral Documents. 

 

ARTICLE
8

 

DEFAULT

 

Section
8.1 
  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 (x) when due of any principal or
      interest installment on the Note, any fee, or any other Indebtedness
      incurred pursuant to this Agreement to the Lender, and such default
      continues unremedied for a period of ten (10) days after the notice
      thereof being given by the Lender to the Borrower, or (y) when due of any
      mandatory prepayment under Subsection
      2.5(b) or Subsection 2.5(c) ,
      and such default continues unremedied for a period of seven (7) days after
      the notice thereof being given by the Lender to the
Borrower.

	 	(b)	Representations
      and Warranties.
      Any representation or warranty made by or on behalf of any Company
      contained in this Agreement, the Note or any of the Collateral Documents
      proves to have been incorrect in any material respect as of the date
      thereof, provided however, that such event will only be an Event of
      Default if the failure of such representation or warranty to be correct
      would have a Material Adverse Effect. 

 

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	 	(c)	Specific
      Covenants.
      The Borrower fails to observe or perform at any time any covenant or
      agreement contained in Section
      5.15,
      Section
      5.17,
      Section
      5.18,
      Section
      6.1,
      Section
      6.2,
      Section
      6.3,
      Section
      6.4,
      Section
      6.5,
      Section
      6.8,
      Section
      6.10,
      Section
      6.14,
      Section
      6.15,
      Section
      6.16
      and Section
      6.17 of
      this Agreement.

	 	(d)	Covenants.
      The Borrower or other party thereto (other than the Lender) defaults in
      any material respect in the observance or performance of any of the
      covenants or agreements contained in this Agreement, the Note or any of
      the Collateral Documents to be kept or performed by the Borrower or such
      Person (other than a default under Subsections (a) through (c) hereof),
      and such default continues unremedied for a period of thirty (30) days
      (or, if applicable, any longer cure period expressly set forth in any of
      the Collateral Documents) after notice thereof being given by the Lender
      to the Borrower and such other party. 

	 	(e)	Other
      Debt to Lender.
      The Borrower defaults on the payment of any amounts due to the Lender or
      in the observance or performance of any of the covenants or agreements
      contained in any loan agreement or any promissory note relating to any
      Debt for borrowed money of the Borrower to the Lender other than the Loan,
      and any grace period applicable to such default has
elapsed.

	 	(f)	Other
      Debt to Other Lenders.
      The Borrower defaults in the payment of any amounts due to any Person
      (other than the Lender) or in the observance or performance of any of the
      covenants or agreements contained in any credit agreements, notes, leases,
      collateral or other documents relating to any Debt (senior, pari passu or
      subordinate) of the Borrower to any Person (other than the Lender) in
      excess of $250,000.00, and, in either case, any grace period applicable to
      such default has elapsed, including without limitation if any event or
      condition occurs that results in any such Debt becoming due prior to its
      scheduled maturity or that enables or permits (with or without the giving
      of notice, the lapse of time or both) the holder of any such Debt to cause
      any portion of such Debt to become due prior to its scheduled maturity or
      payment date or to require the prepayment thereof (in each case after
      giving effect to any applicable cure period). 

 

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	 	(g)	Involuntary
      Bankruptcy or Receivership Proceedings. A
      receiver, conservator, liquidator or trustee of any Company, or of any of
      its property, is appointed by order or decree of any court or agency or
      supervisory authority having jurisdiction; or an order for relief is
      entered against any Company under the Federal Bankruptcy Code; or any
      Company is adjudicated bankrupt or insolvent; or any material portion of
      the property of any Company is sequestered by court order and such order
      remains in effect for more than 30 days after such party obtains knowledge
      thereof; or a petition is filed against any Company under any
      reorganization, arrangement, insolvency, readjustment of debt,
      dissolution, liquidation or receivership law of any jurisdiction, whether
      now or hereafter in effect, and such petition is not dismissed within 60
      days. 

	 	(h)	Voluntary
      Petitions.
      Any Company files a case under the Federal Bankruptcy Code or seeking
      relief under any provision of any bankruptcy, reorganization, arrangement,
      insolvency, readjustment of debt, dissolution or liquidation law of any
      jurisdiction, whether now or hereafter in effect, or consents to the
      filing of any case or petition against it under any such law.

	 	(i)	Assignments
      for Benefit of Creditors.
      Any Company makes an assignment for the benefit of its creditors, or
      admits in writing its inability to pay its debts generally as they become
      due, or consents to the appointment of a receiver, trustee or liquidator
      of any Company or of all or any part of its property.

	 	(j)	Undischarged
      Judgments.
      Judgment for the payment of money in excess of $100,000.00 (which is not
      covered by insurance) is rendered by any court or other governmental body
      against any Company, and such Company does not discharge the same or
      provide for its discharge in accordance with its terms, or procure a stay
      of execution thereof within 30 days from the date of entry thereof, and
      within said 30-day period or such longer period during which execution of
      such judgment shall have been stayed, appeal therefrom and cause the
      execution thereof to be stayed during such appeal while providing such
      reserves therefor as may be required under generally accepted accounting
      principles.

 

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	 	(k)	Attachment. A
      writ or warrant of attachment or any similar process shall be issued by
      any court against all or any material portion of the Collateral, and such
      writ or warrant of attachment or any similar process is not released or
      bonded within 30 days after its entry.

	 	(l)	Condemnation.
      The Collateral, or any substantial portion thereof, is condemned or
      expropriated under power of eminent domain by any legally constituted
      governmental authority.

	 	(m)	Invalidity.
      Any Company shall assert in writing that any material provision of this
      Agreement, the Note or any of the Collateral Documents shall for any
      reason be or cease to be valid and binding on such Company after the
      Closing Date.

	 	(n)	Change
      of Control. A
      Change of Control shall occur.

	 	(o)	Herlin.
      Robert S. Herlin shall cease for any reason to be actively employed full
      time as President of the Borrower, as his primary and essentially
      exclusive business activity, as contemplated by Section
      6.12;
      provided, however, that the cessation of employment of Mr. Herlin shall
      not be a Default hereunder so long as the Borrower hires or promotes a
      replacement officer with experience and qualifications reasonably
      acceptable to the Lender within 90 days of Mr. Herlin’s cessation of full
      active employment.

 

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Section
8.2 
  Remedies.

 

(a) 
  Upon the
happening of any Event of Default specified in the preceding Section (other than
Subsections (g) or (h) thereof), (i) all obligations, if any, of the Lender to
make Advances to the Borrower shall immediately cease and terminate, and (ii)
the Lender may by written notice to the Borrower declare the entire principal
amount of
all Indebtedness then outstanding including interest accrued thereon to be
immediately due and payable without presentment, demand, protest, notice of
protest or dishonor or other notice of default of any kind, all of which are
hereby expressly waived by the Borrower.

 

(b) 
  Upon the
happening of any Event of Default specified in Subsections (g) or (h) of the
preceding Section, (i) all obligations, if any, of the Lender to make Advances
to the Borrower shall immediately cease and terminate, and (ii) the entire
principal amount of all obligations then outstanding including interest accrued
thereon shall, without notice or action by the Lender, be immediately due and
payable without presentment, demand, protest, notice of protest or dishonor or
other notice of default of any kind, all of which are hereby expressly waived by
the Borrower.

 

(c) 
  In
addition to the foregoing, the Lender may exercise any of the rights and
remedies established in the Collateral Documents or avail itself of any other
rights and remedies provided by applicable law.

 

Section
8.3 
  Set-Off. Upon
the occurrence of any Event of Default, the Lender shall have the right to
set-off any funds of the Borrower or any Company in the possession or control of
the Lender (including without limitation funds in the accounts provided for in
Article 5) against any amounts then due by the Borrower to the Lender pursuant
to the Agreement.

 

Section
8.4 
  Marshaling. The
Companies shall not at any time hereafter assert any right under any law
pertaining to marshaling (whether of assets or liens) and the Borrower expressly
agrees that the Lender may execute or foreclose upon the Collateral Documents in
such order and manner as the Lender, in its sole discretion, deems appropriate.

 

ARTICLE
9

 

 

MISCELLANEOUS

 

Section
9.1 
  Notices. Any
notice or demand which, by provision of this Agreement or any Collateral
Document referencing this provision, is required or permitted to be given by one
Person to another Person, shall be given by (i) deposit, postage prepaid, in the
mail, registered or certified mail, or (ii) delivery to a recognized express
courier service, or (iii) delivery by hand, or (iv) by facsimile, in each case
addressed (until another address or addresses is given in writing by such party
to the other party) as follows: 

 

NGS/Prospect
Loan Agreement 

NGS/Prospect
Loan Agreement 

NGS/Prospect
Loan Agreement 

 

	 	
      If
      to Borrower
	
      Natural
      Gas Systems, Inc.

	 	
      or
      any Subsidiary:
	
      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

	 	 	 
	 	
       
	
      AND

	 	 	 
	 	
       
	
      Laird
      Cagan, Chairman

	 	
       
	
      10600
      N. De Anza Blvd., Suite 250

	 	
       
	
      Cupertino,
      California 95014

	 	 	 
	 	
       
	
      Facsimile
      Number: (408) 904-6085

	 	
       
	
      Telephone
      Number: (408) 873-0400

	 	 	 
	 	
      With
      copies to
	
      Troy
      & Gould

	 	
      (which
      copies shall
	
      1801
      Century Park East, 16th Floor

	 	
      not
      constitute
	
      Los
      Angeles, California 90067-2367

	 	
      notice)
	 
	 	 	
      Attention:
      Lawrence P. Schnapp

	 	 	 
	 	 	
      Facsimile
      Number: (310) 201-4746

	 	 	
      Telephone
      Number: (310) 553-4441

	 	 	 
	 	 	
      AND

	 	 	 
	 	 	
      Steven
      D. Lee

	 	
       
	
      10600
      N. De Anza Blvd., Suite 250

	 	
       
	
      Cupertino,
      California 95014

	 	 	 
	 	
       
	
      Facsimile
      Number: (415) 358-4579

	 	
       
	
      Telephone
      Number: (650) 303-2313

	 	 	 
	 	
      If
      to Lender:
	
      Prospect
      Energy

	 	
       
	
      10
      East 40th Street, Suite 4400

	 	
       
	
      New
      York, New York 10016

	 	 	 
	 	
       
	
      Attention:
      John Barry, Chief Executive Officer

	 	 	 
	 	
       
	
      Facsimile
      Number: (212) 448-9652

	 	
       
	
      Telephone
      Number: (212) 448-0702 x14

 

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All
notices sent by facsimile transmission shall be deemed received by the addressee
upon the transmitter’s receipt of acknowledgment of receipt from the offices of
such addressee (if before 5:00 p.m. on a Business Day; if later, then on the
next Business Day). 

 

Section
9.2 
  Entire
Agreement. This
Agreement, the Note and the Collateral Documents and the Warrants set forth the
entire agreement of the Lender and the Borrower with respect to the
Indebtedness, and supersede all prior written or oral understandings with
respect thereto; provided, however, that all written representations, warranties
and certifications made by the Borrower to the Lender with respect to the
Indebtedness and the security therefor shall survive the execution of this
Agreement. The Borrower is not relying on any representation by the Lender, and
no representation has been made, that the Lender will, at the time of a Default
or at any other time, waive, negotiate, discuss, or take or refrain from taking
any action with respect to such Default.

 

Section
9.3 
  Renewal,
Extension or Rearrangement. All
provisions of this Agreement relating to the Note shall apply with equal force
and effect to each and all promissory notes or security instruments hereinafter
executed which in whole or in part represent a renewal, extension for any
period, increase or rearrangement of any part of the Note.

 

Section
9.4 
  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
9.5 
  Invalidity. In the
event that any one or more of the provisions contained in this Agreement, the
Note, or the Collateral Documents 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 Agreement, the
Note or the Collateral Documents.

 

Section
9.6 
  Survival
of Agreements. All
representations and warranties of the Borrower herein, and all covenants and
agreements herein not fully performed before the effective date of this
Agreement, shall survive such date. 

 

Section
9.7 
  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, the
Note or the Collateral Document and the Warrants, shall operate as a waiver
thereof. 

 

Section
9.8 
  Cumulative
Rights. The
rights and remedies of the Lender under this Agreement, the Note and the
Collateral Documents and the Warrants 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
9.9 
  Time
of the Essence. Time
shall be deemed of the essence with respect to the performance of all of the
terms, provisions and conditions on the part of the Borrower and the Lender to
be performed hereunder.

 

 

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Section
9.10 
  Successors
and Assigns.

 

(a) 
  All
covenants and agreements made by or on behalf of the Borrower in this Agreement,
the Note and the Collateral Documents shall bind its successors and assigns and
shall inure to the benefit of the Lender and its successors and assigns. The
Borrower may not assign its rights or obligations under this
Agreement.

 

(b) 
  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 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 Agreement.

 

Section
9.11 
  Relationship
Between the Parties. The
relationship between the Lender and the Borrower shall be solely that of lender
and borrower, and such relationship shall not, under any circumstances
whatsoever, be construed to be a joint venture, joint adventure, or partnership.
The Lender has no fiduciary obligation to the Borrower with respect to this
Agreement or the transactions contemplated hereby.

 

Section
9.12 
  Limitation
of Liability. This
Agreement, the Note and the Collateral Documents are executed by an officer of
the Lender, and by acceptance of the Loan, the Borrower agrees that for the
payment of any claim or the performance of any obligations hereunder resulting
from any default by the Lender, resort shall be had solely to the assets and
property of the Lender, and no shareholder, officer, employee or agent of the
Lender shall be personally liable therefor.

 

Section
9.13 
  Titles
of Articles, Sections and Subsections. All
titles or headings to articles, sections, subsections or other divisions of this
Agreement 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
9.14 
  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
9.15    GOVERNING
LAW.
THIS AGREEMENT IS, AND THE NOTE WILL BE, CONTRACTS MADE UNDER AND SHALL BE
CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE INTERNAL LAWS OF
LOUISIANA.

 

Section
9.16 
  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 together shall constitute one and the same instrument. 

 

Section
9.17 
  WAIVER
OF JURY TRIAL; SUBMISSION TO JURISDICTION.

 

 

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Loan Agreement 

(a) 
  THE
BORROWER AND THE LENDER HEREBY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING
TO WHICH THE BORROWER AND THE LENDER MAY BE PARTIES, ARISING OUT OF OR IN ANY
WAY PERTAINING TO (i) THE NOTE, (ii) THIS AGREEMENT, (iii) THE COLLATERAL
DOCUMENTS AND THE WARRANTS OR (iv) THE COLLATERAL. IT IS AGREED AND UNDERSTOOD
THAT THIS WAIVER CONSTITUTES A WAIVER OF TRIAL BY JURY OF ALL CLAIMS AGAINST ALL
PARTIES TO SUCH ACTIONS OR PROCEEDINGS, INCLUDING CLAIMS AGAINST PARTIES WHO ARE
NOT PARTIES TO THIS AGREEMENT. THIS WAIVER IS KNOWINGLY, WILLINGLY AND
VOLUNTARILY MADE BY THE BORROWER AND THE LENDER, AND THE BORROWER AND THE
LENDER
HEREBY REPRESENT THAT NO REPRESENTATIONS OF FACT OR OPINION HAVE BEEN MADE BY
ANY INDIVIDUAL TO INDUCE THIS WAIVER OF TRIAL BY JURY OR TO IN ANY WAY MODIFY OR
NULLIFY ITS EFFECT. THE BORROWER AND THE LENDER FURTHER REPRESENT THAT IT HAS
BEEN REPRESENTED IN THE SIGNING OF THIS AGREEMENT AND IN THE MAKING OF THIS
WAIVER BY INDEPENDENT LEGAL COUNSEL, SELECTED OF ITS OWN FREE WILL, AND THAT IT
HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL.

 

(b) 
  THE
BORROWER HEREBY IRREVOCABLY CONSENTS TO THE NON-EXCLUSIVE JURISDICTION OF
ANY STATE COURT OF LOUISIANA OR FEDERAL COURT SITTING IN LOUISIANA, AND AGREES
THAT ANY ACTION OR PROCEEDING ARISING OUT OF OR BROUGHT TO ENFORCE THE
PROVISIONS OF THE NOTE, THIS AGREEMENT AND/OR THE COLLATERAL DOCUMENTS MAY BE
BROUGHT IN ANY COURT HAVING SUBJECT MATTER JURISDICTION. THE BORROWER HEREBY
IRREVOCABLY WAIVES ANY OBJECTIONS THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE
OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT ANY SUCH ACTION OR
PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM
THE SAME. THE BORROWER AGREES THAT NOTHING HEREIN SHALL LIMIT THE LENDER’S RIGHT
TO SUE IN ANY OTHER JURISDICTION.

 

(c) 
  THE
BORROWER HEREBY AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING
MAY BE EFFECTED BY MAILING A COPY BY REGISTERED OR CERTIFIED MAIL (OR ANY
SUBSTANTIALLY SIMILAR FORM OF MAIL) POSTAGE PREPAID, TO THE BORROWER AT ITS
ADDRESS SET FORTH IN SECTION 9.1 OR AT SUCH OTHER ADDRESS AS TO WHICH THE LENDER
SHALL HAVE BEEN NOTIFIED PURSUANT THERETO. THE BORROWER AGREES THAT NOTHING
HEREIN SHALL AFFECT THE RIGHT TO EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER
PERMITTED BY LAW.

 

Section
9.18 
  AGREEMENT
SUPERCEDES ALL PRIOR AGREEMENTS. THIS
AGREEMENT, TOGETHER WITH THE NOTE, THE COLLATERAL DOCUMENTS, THE WARRANTS, AND
ANY OTHER WRITTEN INSTRUMENTS EXECUTED PURSUANT TO THIS AGREEMENT REPRESENT,
COLLECTIVELY, THE FINAL AGREEMENT BETWEEN THE PARTIES HERETO WITH RESPECT TO THE
SUBJECT HEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES AND SHALL
SUPERSEDE ANY PRIOR AGREEMENT BETWEEN THE PARTIES HEREOF, WHETHER WRITTEN OR
ORAL, RELATING TO THE SUBJECT HEREOF. THERE ARE NO UNWRITTEN ORAL AGREEMENTS
BETWEEN THE PARTIES.

 

 

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NGS/Prospect
Loan Agreement 

Section
9.19 
  Patriot
Act. The
Lender hereby notifies the Borrower that pursuant to the requirements of the
Patriot Act, it is required to obtain, verify and record information that
identifies the Borrower and the other Companies, which information includes the
name and address of the Borrower and other information that will allow the
Lender to identify the Borrower in accordance with the Patriot Act.

 

Section
9.20 
  Confidentiality.
The Lender
shall hold all non-public information obtained pursuant to the requirements of
this Agreement in accordance with the Lender’s customary procedures for handling
confidential information of this nature and in accordance with safe and sound
commercial lending practices. It is understood and agreed by the Borrower that
the Lender may make disclosures (a) to its Affiliates and to its Affiliates’
directors, officers, employees and agents, including accountants, legal counsel,
petroleum engineers and other advisors (it being understood that the Persons to
whom such disclosure is made will be informed of the confidential nature of such
information and instructed to keep such information confidential), (b) to the
extent requested by any government authority, (c) to the extent required by
applicable laws or regulations or by any subpoena or similar legal process, (d)
to any other party to this Agreement, (e) for the purposes specified in this
Agreement or in the Collateral Documents, (f) in connection with the exercise of
any remedies hereunder or any suit, action or proceeding relating to this
Agreement or the enforcement of the rights hereunder or under the Collateral
Documents, (g) subject to an agreement containing provisions substantially the
same as those in this Section
9.20, to (1)
any assignee or any prospective eligible assignee of any of its rights or
obligations under this Agreement, or (2) any actual or proposed contractual
counterparty (or its professional advisors) to any Hedge Agreement relating to a
party’s obligations hereunder, (h) with the consent of the Borrower, (i) to the
extent such information (1) becomes publicly available other than as a result of
a breach of this Section
9.20, or (2)
becomes available to the Lender on a nonconfidential basis from a source other
than the Borrower, or (j) any nationally recognized rating agency that requires
access to information about the Lender’s or its Affiliates’ investment portfolio
in connection with ratings issued with respect to the Lender or its Affiliates.
However, no information that is designated as privileged or as attorney work
product by the Borrower may be disclosed to any Person unless such Person is the
Lender or a participant hereunder or its legal counsel. In no event shall the
Lender be obligated or required to return any materials furnished by the
Borrower.

 

 

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NGS/Prospect
Loan Agreement 

 

IN
WITNESS WHEREOF, the parties hereto have caused this instrument to be duly
executed as of the date first above written.

 

	 	 	 
	 BORROWER:	NATURAL GAS SYSTEMS,
      INC.
	 
 	 
 	 
 
		By:  	/s/ 
	 	
      

      Name:    Robert
      S. Herlin
	 	Title:     
      President & CEO

 

     

	 	 	 
	LENDER:	PROSPECT ENERGY
      CORPORATION
	 
 	 
 	 
 
		By:  	/s/ 
	 	
      

      Name: Bart J. de Bie
	 	Title:   Authorized
      Representative 

           

 

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