CREDIT AGREEMENT

 

 

 

Dated as of

August 15, 2014

by and among

HYDROCARB ENERGY COPORATION

as the Borrower,

SHADOW TREE CAPITAL MANAGEMENT LLC

as the Agent,

And

THE LENDERS PARTY HERETO

as the Lenders

 

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TABLE OF CONTENTS

 

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Annex I –Lenders and Commitment Amounts

 

Exhibit A -Form of Term Loan Note

Exhibit B-Form of Additional Note

Exhibit C-Form of Pledge Agreement

Exhibit D-List of Security Instruments

Exhibit E-Form of Guarantee and Collateral Agreement

Exhibit F-Form of Deed of Trust, Fixture Filing, Assignment of As-Extracted Collateral, Security Agreement and Financing Statement

Exhibit G-Form of Letters In Lieu

Exhibit H-Form of Stock Grant Agreement

Exhibit I-Broker’s Fee Agreement

Exhibit J-[reserved]

Exhibit K-Form Of Compliance Certificate

Exhibit L Form of Assignment and Assumption Agreement

 

Schedule 1.02 - Galveston Bay, Texas Oilfield Properties Subject to Borrower Leasehold Interests

Schedule 8.01- Existing or Outstanding Rights for the Acquisition of Equity Interests

Schedule 8.03 - Required Approvals and Consents

Schedule 8.05 - Litigation

Schedule 8.06 - Environmental Matters

Schedule 8.06(I) - Leases/Properties Associated or Part of Bankruptcy or Foreclosure Proceeding

Schedule 8.09 - Borrower Group’s Prohibited Directors and Officers

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Schedule 8.10 - Tax Matters

Schedule 8.11 – Verification of ERISA Bond

Schedule 8.13 - Insurance

Schedule 8.15 - Subsidiaries and Partnerships

Schedule 8.17(a) – Oil and Gas Properties Leases

Schedule 8.17(f) – List of Division of Interests of Leases set forth on Schedule 8.17(a)

Schedule 8.19 - Gas Imbalances

Schedule 8.20 - Marketing Contracts

Schedule 8.25 - Material Agreements

Schedule 8.28 – Investments and Guarantees

Schedule 8.29 - Certain Matters Regarding Payment by Purchasers of Production

Schedule 8.30 - Past Due Accounts Payable

Schedule 8.33 - Employee Matters

Schedule 8.35 - Capitalized Leases

Schedule 10.02 - Debt

Schedule 10.03 - Excepted Liens

Schedule 10.05 - Investments

Schedule 10.07 - Leases

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THIS CREDIT AGREEMENT (this “Agreement”) dated as of August 15, 2014 (the “Effective Date”), is by and between Hydrocarb Energy Corporation, a corporation duly formed and existing under the laws of the State of Nevada (the “Borrower”), the other Persons who hereafter become parties to this Agreement as members of the Borrower Group; each of the Lenders from time to time party hereto; and Shadow Tree Capital Management LLC, a limited liability company duly formed and existing under the laws of the State of Delaware, as agent for the Lenders (in such capacity, together with its successors in such capacity, the “Agent”).

W I T N E S S E T H:

WHEREAS, the Borrower has requested that the Lenders provide certain senior secured term loans to the Borrower.

WHEREAS, the Lenders have agreed to make such loans subject to the terms and conditions of this Agreement.

NOW THEREFORE, in consideration of the mutual covenants and agreements herein contained and of the loans hereinafter referred to, the parties hereto agree as follows:

ARTICLE I

Definitions and Accounting Matters.

“Account Control Agreement” means the deposit and control agreements entered into from time to time between the Agent and a member of the Borrower Group to allow for the Agent to perfect the Lenders’ security interest in such member of the Borrower Group’s deposit accounts.

“Additional Funded Amount” has the meaning assigned such term in Section 2.02.

“Additional Loan” has the meaning assigned such term in Section 2.02.

“Additional Loan Interest Rate” means interest on the principal of the Additional Loan and (to the fullest extent permitted by law) on any fees and other amounts payable by the Borrower hereunder, under the Additional Note or under any other Loan Document for the period commencing on the first day of the Additional Loan Term through the date the Additional Loan shall be paid in full, equal to fourteen percent (14%) per annum but in no event to exceed the Highest Lawful Rate.

“Additional Loan Term” means the day on which the Additional Funded Amount is advanced to the Borrower until the Maturity Date.

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“Additional Note” means the additional term loan note of the Borrower described in Section 2.05, together with all amendments, modifications, replacements, extensions and rearrangements thereof.

“Affiliate” means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified.

“Agreement” has the meaning assigned such term in the introduction.

“Applicable Law” means (a) any domestic or foreign statute, law (including common and civil law), treaty, code, ordinance, order, determination, rule, regulation or by-law (zoning or otherwise), energy regulations and occupational, safety and health standards or controls, franchise, permit, authorization or other directive or requirement (whether or not having the force of law) of any Governmental Authority, (b) any judgment, order, writ, injunction, decision, ruling, decree or award made by a court of competent jurisdiction, (c) any binding regulatory policy, practice, guideline, directive, rule or restriction having the force of law, or (d) any provisions of the foregoing, including general principles of common and civil law and equity, binding on or affecting the Person referred to in the context in which the term is used or binding on or affecting the property of such Person, whether now or hereinafter in effect.

“Approved Petroleum Engineers” means (a) Ralph E. Davis Associates, Inc., (b) Williamson Petroleum Consultants, Inc., (c) Netherland, Sewell & Associates, Inc., (d) Cawley, Gillespie and Associates, Inc., or any other independent petroleum engineers reasonably acceptable to the Agent in its discretion.

“Assignment and Assumption” means an assignment and assumption entered into by a Lender and an assignee with the consent of any party whose consent is required by Section 13.14(b), and accepted by the Agent, in the form of Exhibit L or any other form approved by the Agent.

“Board” means the Board of Governors of the Federal Reserve System of the United States of America or any successor Governmental Authority.

“Board of Directors” means, with respect to any Person, the board of directors (or comparable managers) of such Person or any committee thereof duly authorized to act on behalf of such board of directors (or comparable managers).

“Borrower” means Hydrocarb Energy Corporation, a Nevada corporation.

“Borrower Group” means the Borrower, each of its Subsidiaries and each other Person who executes this Agreement as a member of the “Borrower Group” or is a Guarantor and who grants a Lien on all or substantially all of its assets to secure all or part of the Indebtedness and/or all of the stock of which is pledged to the Agent for the Lenders.

“Business Day” means any weekday on which the Federal Reserve Bank of New York is open for business.

“Capital Expenditures” means, in respect of any Person, for any period, the aggregate (determined without duplication) of all exploration and development expenditures and costs that should be capitalized in accordance with GAAP and any other expenditures that are capitalized on the balance sheet of such Person in accordance with GAAP.

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“Capital Expenditure Plan” means such plan as is provided by the Borrower to the Agent prior to the Effective Date itemizing the funds to be used by the Borrower to acquire or upgrade the Borrower Group’s Properties in order to maintain or increase the scope of the Borrower Group’s operations.

“Capital Leases” means, in respect of any Person, all leases which shall have been, or should have been, in accordance with GAAP, recorded as capital leases on the balance sheet of the Person liable (whether contingent or otherwise) for the payment of rent thereunder, in each case taken at the amount thereof accounted for as indebtedness in accordance with GAAP.

“Cash” means money, currency or a credit balance in any demand or deposit account.

“Cash Equivalents” means, as at any date of determination, (a) marketable securities (i) issued or directly and unconditionally guaranteed as to interest and principal by the United States Government, or (ii) issued by any agency of the United States the obligations of which are backed by the full faith and credit of the United States, in each case maturing within one year after such date; (b) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof, in each case maturing within one year after such date and having, at the time of the acquisition thereof, a rating of at least A-1 from S&P or at least P-1 from Moody’s; (c) commercial paper maturing no more than one year from the date of creation thereof and having, at the time of the acquisition thereof, a rating of at least A-1 from S&P or at least P-1 from Moody’s; (d) certificates of deposit or bankers’ acceptances maturing within one year after such date and issued or accepted by any holder or by any commercial bank organized under the laws of the United States of America or any state thereof or the District of Columbia that (i) is at least “adequately capitalized” (as defined in the regulations of its primary Federal banking regulator), and (ii) has Tier 1 capital (as defined in such regulations) of not less than One Hundred Million Dollars ($100,000,000); and (e) shares of any money market mutual fund that (i) has at least ninety five percent (95%) of its assets invested continuously in the types of investments referred to in clauses (a) and (b) above, (ii) has net assets of not less than Five Hundred Million Dollars ($500,000,000), and (iii) has the highest rating obtainable from either S&P or Moody’s.

“Cash Receipts” means all Cash or Cash Equivalents received by or on behalf of any member of the Borrower Group with respect to the following, but, provided that the Borrower is not in default under this Agreement, only to the extent such cash or cash equivalents represents revenues within the United States of America: (a) sales of Hydrocarbons from the Oil and Gas Properties (including any other working interest owner receipts received by a member of the Borrower Group as operator of Oil and Gas Properties), (b) Cash representing operating revenue earned or to be earned by a member of the Borrower Group, (c) any insurance proceeds received by a member of the Borrower Group, and (d) any other Cash or Cash Equivalents received by a member of the Borrower Group from whatever source; provided that advances under the Loans shall not constitute “Cash Receipts”.

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“Casualty Event” means any loss, casualty or other insured damage to, or any nationalization, taking under power of eminent domain or by condemnation or similar proceeding of any Property of a member of the Borrower Group, in each case having a total loss of value to such Property in excess of Twenty Five Thousand Dollars ($25,000).

“Casualty Proceeds” has the meaning assigned such term in Section 6.02.

“Casualty Proceeds Account” has the meaning assigned such term in Section 6.03.

“Change in Control” means any transfer of ownership in one or more members of the Borrower Group that in the aggregate exceeds twenty five percent (25%) of the voting common stock of such member of the Borrower Group or membership interest or similar Equity Interest having the right to control the affairs of such member of the Borrower Group.

“Change in Law” means (a) the adoption of any law, rule or regulation after the Effective Date by any Governmental Authority, (b) any change in any law, rule or regulation or in the interpretation or application thereof by any Governmental Authority after the Effective Date or (c) compliance by the Agent or Lenders with any request, guideline or directive (whether or not having the force of law) of any Governmental Authority made or issued after the Effective Date.

“Charter Documents” means the charter, certificate of formation, certificate of incorporation, certificate of organization, certificate of limited partnership, bylaws, operating agreement, regulations, limited liability company agreement, limited partnership agreement or other organizational or formation documents of a business entity.

“Closing Date” has the meaning assigned such term in Section 7.01.

“Code” means the Internal Revenue Code of 1986, as amended from time to time, and any successor statute.

“Collateral” (i) has the meaning assigned in the Guarantee and Collateral Agreement and (ii) means (a) the Mortgaged Property and any rights, title and interests of any member of the Borrower Group in such Mortgaged Property together with all proceeds thereof and (b) any and all other United States-based Properties of any member of the Borrower Group of whatsoever kind or description (whether now owned or hereafter acquired); provided that Borrower’s ownership interests in the Inactive Subsidiary shall be excluded from the Collateral for so long as Borrower’s representations and warranties with respect to the Inactive Subsidiary are accurate in all material respects and Borrower performs its covenants herein with respect to the Inactive Subsidiary.

“Commitment Amount” means, with respect to each Lender, the commitment of such Lender to fund a portion of the Term Loan and the Additional Loan, the amount of which is set forth as to each Lender on Annex I.

“Common Shares” means the shares of common stock of the Borrower.

“Control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. For the purposes of this definition, and without limiting the generality of the foregoing, any Person that owns directly or indirectly twenty percent (20%) or more of the Equity Interests having ordinary voting power for the election of the Board of Directors or other governing body of a Person (other than as a limited partner of such other Person) will be deemed to “control” such other Person. “Controlling” and “Controlled” have meanings correlative thereto.

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“Corporate Purposes” means with respect to the Use of Proceeds in Section 2.03(ii), the portion of Proceeds that may be used as follows: (i) up to Four Hundred Fifty Thousand Dollars ($450,000) for payments of accounts payables outstanding on the Effective Date; (ii) up to Two Hundred Fifty Thousand Dollars ($250,000) for International Projects; (iii) up to One Hundred Fifty Thousand Dollars ($150,000) for Property Taxes due but unpaid on the Effective Date; (iv) and One Hundred Thirty Thousand Dollars ($130,000) for severance taxes and payments to the General Land Office and Texas Commission on Environmental Quality due but unpaid on the Effective Date as a result of ERG's failure to pay while owner of Galveston Bay Energy, LLC.  For the avoidance of doubt, fees and expenses of the transaction contemplated by this Agreement, as referred to in Section 2.03(a)(iii), are not included in Corporate Purposes.

“Debt” means, for any Person, on a consolidated basis, the sum of the following (without duplication): (a) all obligations of such Person for borrowed money or evidenced by bonds, bankers’ acceptances, debentures, notes or other similar instruments; (b) all obligations of such Person (whether contingent or otherwise) in respect of letters of credit, surety or other bonds and similar instruments; (c) all accounts payable and all accrued expenses, liabilities or other obligations of such Person to pay the deferred purchase price of Property or services; (d) all obligations under Capital Leases; (e) all obligations under Synthetic Leases; (f) all Debt (as defined in the other clauses of this definition) of others secured by a Lien on any Property of such Person, whether or not such Debt is assumed by such Person; (g) all Debt (as defined in the other clauses of this definition) of others guaranteed by such Person or in which such Person otherwise assures a creditor against loss of the Debt (howsoever such assurance shall be made) to the extent of the lesser of the amount of such Debt and the maximum stated amount of such guarantee or assurance against loss; (h) all obligations or undertakings of such Person to maintain or cause to be maintained the financial position or covenants of others or to purchase the Debt or Property of others; (i) obligations to deliver commodities, goods or services, including, without limitation, Hydrocarbons, in consideration of one or more advance payments, other than gas balancing arrangements in the ordinary course of business; (j) obligations to pay for goods or services whether or not such goods or services are actually received or utilized by such Person; (k) any Debt of a partnership for which such Person is liable either by agreement, by operation of law or by any Applicable Law but only to the extent of such liability; (l) Disqualified Capital Stock of such Person; and (m) the undischarged balance of any production payment created by such Person or for the creation of which such Person directly or indirectly received payment. The Debt of any Person shall include all obligations of such Person of the character described above to the extent such Person remains legally liable in respect thereof notwithstanding that any such obligation is not included as a liability of such Person under GAAP.

“Default” means any event or condition which constitutes an Event of Default or that upon notice, lapse of time or both would, unless cured or waived, become an Event of Default.

“Default Rate” means, in respect of the principal amount of the Loans or any other amount payable by the Borrower under this Agreement or any other Loan Document, a rate during the period commencing on the date of occurrence of an Event of Default, whether or not declared, or the failure to deliver any reports required to be delivered under Section 4.01 until such amount is paid in full or all Events of Default are cured or waived equal to twenty four percent (24%) per annum, but in no event to exceed the Highest Lawful Rate.

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“Delayed Collateral” means Borrower’s ownership interests in OTAIBA Hydrocarb LLC and Hydrocarb Namibia Energy (Proprietary) Limited.

“Disqualified Capital Stock” means any Equity Interest that, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable) or upon the happening of any event, matures or is mandatorily redeemable for any consideration other than other Equity Interests (which would not constitute Disqualified Capital Stock), pursuant to a sinking fund obligation or otherwise, or is convertible or exchangeable for Debt or redeemable for any consideration other than other Equity Interests (which would not constitute Disqualified Capital Stock) at the option of the holder thereof, in whole or in part, on or prior to the date that is one year after the earlier of (a) the Maturity Date and (b) the date on which there are no Loans or other obligations hereunder outstanding.

“Dollars” or “$” refers to lawful money of the United States of America.

“Effective Date” has the meaning set forth in the preamble of this Agreement.

“Environmental Laws” means any and all Applicable Laws pertaining in any way to health, safety, the environment or the preservation or reclamation of natural resources, in effect in any and all jurisdictions in which a member of the Borrower Group is conducting or at any time has conducted business, or where any Property of a member of the Borrower Group is located, including without limitation, the Oil Pollution Act of 1990 (“OPA”), as amended, the Clean Air Act, as amended, the Comprehensive Environmental, Response, Compensation, and Liability Act of 1980 (“CERCLA”), as amended, the Federal Water Pollution Control Act, as amended, the Occupational Safety and Health Act of 1970, as amended, the Resource Conservation and Recovery Act of 1976 (“RCRA”), as amended, the Safe Drinking Water Act, as amended, the Toxic Substances Control Act, as amended, the Superfund Amendments and Reauthorization Act of 1986, as amended, the Hazardous Materials Transportation Act, as amended, and other environmental conservation or protection Applicable Laws. The term “oil” shall have the meaning specified in OPA, the terms “hazardous substance” and “release” (or “threatened release”) have the meanings specified in CERCLA, the terms “solid waste” and “disposal” (or “disposed”) have the meanings specified in RCRA and the term “oil and gas waste” shall mean those waste that are excluded from the definition of “hazardous waste” pursuant to 40 C.F.R. Section 261.4(b)(5) (“Section 261.4(b)(5)”); provided, however, that (a) if either OPA, CERCLA, RCRA or Section 261.4(b)(5) is amended so as to broaden the meaning of any term defined thereby, such broader meaning shall apply subsequent to the effective date of such amendment and (b) to the extent the laws of the state or other jurisdiction in which any Property of a member of the Borrower Group is located establish a meaning for “oil,” “hazardous substance,” “release,” “solid waste,” “disposal” or “oil and gas waste” which is broader than that specified in either OPA, CERCLA, RCRA or Section 261.4(b)(5), such broader meaning shall apply.

“Environmental Permit” means any permit, registration, license, approval, consent, exemption, variance, or other authorization required under or issued pursuant to applicable Environmental Laws.

“Equity Interests” means shares of capital stock, partnership interests, membership interests in a limited liability company, beneficial interests in a trust or other equity ownership interests in a Person, and any warrants, options or other rights entitling the holder thereof to purchase or acquire any such Equity Interest.

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“ERISA” means the Employee Retirement Income Security Act of 1974, as amended, and any successor statute.

“ERISA Affiliate” means each trade or business (whether or not incorporated) which together with the Borrower or any other member of the Borrower Group would be deemed to be a “single employer” within the meaning of section 4001(b)(1) of ERISA or subsections (b), (c), (m) or (o) of section 414 of the Code.

“ERISA Event” means (a) a “Reportable Event” described in section 4043 of ERISA and the regulations issued thereunder, (b) the withdrawal of the Borrower, a Subsidiary or any ERISA Affiliate from a Plan during a plan year in which it was a “substantial employer” as defined in section 4001(a)(2) of ERISA, (c) the filing of a notice of intent to terminate a Plan or the treatment of a Plan amendment as a termination under section 4041 of ERISA, (d) the institution of proceedings to terminate a Plan by the PBGC, (e) receipt of a notice of withdrawal liability pursuant to Section 4202 of ERISA or (f) any other event or condition which might constitute grounds under section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan.

“Event of Default” has the meaning assigned such term in Section 11.01.

“Excepted Liens” means: (a) Liens for Taxes, assessments or other governmental charges or levies that are not yet due or that are being contested in good faith by appropriate action and for which adequate reserves have been maintained in accordance with GAAP in an account controlled by the Agent; (b) Liens in connection with workers’ compensation, unemployment insurance or other social security, old age pension or public liability obligations that are not yet due or that are being contested in good faith by appropriate action and for which adequate reserves have been maintained in accordance with GAAP in an account controlled by the Agent; (c) statutory landlord’s liens, operators’, vendors’, carriers’, warehousemen’s, repairmen’s, mechanics’, suppliers’, workers’, materialmen’s, construction, mineral or other like Liens arising by operation of law in the ordinary course of business or incident to the exploration, development, operation and maintenance of Oil and Gas Properties each of which is in respect of obligations that have not been outstanding for more than thirty (30) days after such obligations are due and payable and provided, if such Liens are being disputed, are being contested in good faith by appropriate action and for which adequate reserves have been maintained in accordance with GAAP, each of which Liens is described in Schedule 10.03; (d) contractual Liens which arise in the ordinary course of business under operating agreements, unitization agreements and pooling agreements to secure amounts owing, which amounts are not yet due or are being contested in good faith by appropriate action and for which adequate reserves have been maintained in accordance with GAAP; (e) easements, restrictions, servitudes, permits, conditions, covenants, exceptions or reservations in any Property of a member of the Borrower Group for the purpose of roads, pipelines, transmission lines, transportation lines, distribution lines for the removal of gas, oil, coal or other minerals or timber, and other like purposes, or for the joint or common use of real estate, rights of way, facilities and equipment, which in the aggregate do not materially impair the use of such Property for the purposes of which such Property is held by a member of the Borrower Group or materially impair the value of such Property subject thereto; (f) Liens on cash or securities pledged to secure performance of tenders, surety and appeal bonds, government contracts, performance and return of money bonds, bids, trade contracts, leases, statutory obligations, regulatory obligations and other obligations of a like nature incurred in the ordinary course of business; and (g) rights of set off or banker’s Liens created by Applicable Law in favor of commercial banks with respect to any bank account of Borrower; provided, further that Liens described in clauses (a) through (d) shall remain “Excepted Liens” only for so long as no action to enforce such Lien has been commenced and no intention to subordinate the first priority Lien granted in favor of the Agent and the Lenders is to be hereby implied or expressed by the permitted existence of such Excepted Liens.

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“Exchange Act” means the United Stated Securities Exchange Act of 1934, as amended.

“Excluded Taxes” means, with respect to a Lender, or any other recipient of any payment to be made by or on account of any obligation of the Borrower or any Guarantor hereunder or under any other Loan Document, (a) income or franchise taxes imposed on (or measured by) its net income by the United States of America or such other jurisdiction under the laws of which such recipient is organized or in which its principal office is located or, in the case of a Lender, in which its applicable lending office is located, and (b) any branch profits taxes imposed by the United States of America or any similar tax imposed by any other jurisdiction in which the Borrower or any Guarantor is located.

“Fair Market Value” means, with respect to any asset, property or service, the price that could be negotiated in an arm’s length free market transaction, for Cash, between a willing seller and a willing buyer, neither of whom is under pressure or compulsion to complete the transaction.

“Financial Officer” means, for any Person, a Manager (in the case of a manager-managed limited liability company), the president, chief executive officer or Executive Chairman, chief financial officer, principal accounting officer, treasurer or controller of such Person. Unless otherwise specified, all references herein to a Financial Officer means a Financial Officer of the members of the Borrower Group.

“Funded Amount” has the meaning assigned such term in Section 2.01.

“GAAP” means generally accepted accounting principles in the United States of America as in effect from time to time subject to the terms and conditions set forth in Section 1.04.

“GBE” means Galveston Bay Energy LLC, a limited liability company duly formed and existing under the laws of the State of Texas.

“Galveston Bay Fields” means the Galveston Bay, Texas gas and oil field properties subject to the Borrower Group leasehold interests listed in Schedule 1.02.

“General and Administrative Costs” means normal and customary expenses and costs that are reasonable and classified as general and administrative costs, including, but not limited to, salaries and all other compensation to the management of the Borrower, consulting fees, salary, rent, supplies, travel and entertainment, insurance, accounting, legal, engineering and broker related fees, required to manage the affairs of the Borrower Group.

“Governmental Authority” means the government of the United States of America, any other nation or any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government over the members of the Borrower Group or any of their Properties.

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“Guarantee and Collateral Agreement” means an agreement between the Borrower, each Guarantor and the Agent in substantially the form of Exhibit E, as the same may be amended, modified or supplemented from time to time.

“Guarantor” means any Subsidiary of the Borrower that guarantees the Indebtedness pursuant to Section 9.14(b) and any other Person that guarantees the Indebtedness pursuant to any Security Instruments.

“Hazardous Material” means any substance regulated or as to which liability might arise under any applicable Environmental Law and including, without limitation: (a) any chemical, compound, material, product, byproduct, substance or waste defined as or included in the definition or meaning of “hazardous substance,” “hazardous material,” “hazardous waste,” “solid waste,” “toxic waste,” “extremely hazardous substance,” “toxic substance,” “contaminant,” “pollutant,” or words of similar meaning or import found in any applicable Environmental Law; (b) petroleum hydrocarbons, petroleum products, petroleum substances, natural gas, oil, oil and gas waste, crude oil, and any components, fractions, or derivatives thereof; and (c) radioactive materials, asbestos containing materials, polychlorinated biphenyls, or radon.

“HCN” means Hydrocab Energy Corporation, a Nevada corporation.

“Highest Lawful Rate” means, on any day, the maximum nonusurious rate of interest permitted for that day by whichever of applicable federal law or New York law permits the higher interest rate, stated as a rate per annum.

“Hydrocarbon Interests” means all rights, titles, interests and estates now or hereafter acquired in and to oil and gas leases, oil, gas and mineral leases, or other liquid or gaseous hydrocarbon leases, mineral fee interests, overriding royalty and royalty interests, net profit interests and production payment interests, including any reserved or residual interests of whatever nature owned by the Borrower or its Subsidiaries.

“Hydrocarbons” means oil, gas, casinghead gas, drip gasoline, natural gasoline, condensate, distillate, liquid hydrocarbons, gaseous hydrocarbons, inerts and all products refined or separated therefrom.

“Inactive Subsidiary” meansPenasco Petroleum, Inc.

“Indebtedness” means any and all amounts owing or to become owing by the Borrower, any Subsidiary or any Guarantor to the Lenders under any Loan Document, and (b) all renewals, extensions and/or rearrangements of any of the above.

 “Indemnified Taxes” means Taxes other than Excluded Taxes.

“Indemnitee” has the meaning assigned such term in Section 13.03(b).

“Information” has the meaning assigned such term in Section 13.11.

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“Initial Reserve Report” means a Reserve Report prepared by the Approved Petroleum Engineers as of January 31, 2014 with respect to the Oil and Gas Properties of the Borrower Group in such form and substance satisfactory to the Agent in its reasonable discretion.

“Insolvent” means: (a) with reference to a Person other than a partnership, that (i) the sum of such Person’s debts is greater than all of its properties, at a fair valuation, exclusive of any properties transferred, concealed, or removed with intent to hinder, delay, or defraud creditors or (ii) such Person is generally not able to pay its debts as they become due, and (b) with reference to a Person that is a partnership, that (i) such Person’s financial condition is such that the sum of its debts is greater than the aggregate of, at a fair valuation, (A) all of such partnership’s properties exclusive of properties transferred, concealed or removed with intent to hinder, delay or defraud creditors of the partnership, and (B) the sum of the excess of the value of each general partner’s non-partnership properties, exclusive of properties transferred, concealed or removed with intent to hinder, delay or defraud creditors, over such general partner’s non-partnership debts or (ii) such Person is generally not able to pay its debts as they become due.

“International Projects” means exclusively the Borrower Group’s oil and gas exploration business in Namibia and oilfield services business in the United Arab Emirates.

“Investment” means, for any Person: (a) the acquisition (whether for Cash, Property, services or securities or otherwise) of Equity Interests of any other Person, the contribution of capital to any other Person, or any agreement to make any such acquisition (including, without limitation, any “short sale” or any sale of any securities at a time when such securities are not owned by the Person entering into such short sale) or capital contribution; (b) the making of any deposit with (other than deposits in accounts of the Borrower at commercial banks), or advance, loan or other extension of credit to, any other Person (including the purchase of Property from another Person subject to an understanding or agreement, contingent or otherwise, to resell such Property to such Person, but excluding any such advance, loan or extension of credit having a term not exceeding ninety (90) days representing the purchase price of inventory or supplies sold by such Person in the ordinary course of business) or (c) the entering into of any guarantee of, or other contingent obligation (including the deposit of any Equity Interests to be sold) with respect to, Debt or other liability of any other Person and (without duplication) any amount committed to be advanced, lent or extended to such Person.

“Letters-in-Lieu” means letters-in-lieu substantially in the form of Exhibit G.

“Lenders” means the Persons listed on Annex I, and any Person that shall have become a party hereto pursuant to an Assignment and Assumption, other than any such Person that ceases to be a party hereto pursuant to an Assignment and Assumption.

“Lien” means any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on the common law, statute or contract, and whether such obligation or claim is fixed or contingent, and including but not limited to (a) the lien or security interest arising from a mortgage, encumbrance, pledge, security agreement, conditional sale or trust receipt or a lease, consignment or bailment for security purposes or (b) royalties, production payments and the like payable out of Oil and Gas Properties. The term “Lien” shall include easements, restrictions, servitudes, permits, conditions, covenants, encroachments, exceptions, title exceptions or reservations. For the purposes of this Agreement, any member of the Borrower Group shall be deemed to be the owner of any Property which it has acquired or holds subject to a conditional sale agreement, or leases under a financing lease or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person in a transaction intended to create a financing.

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“Loans” means collectively the Term Loan and the Additional Loan.

“Loan Documents” means this Agreement, the Term Note, the Additional Note, and the Security Instruments.

“Material Adverse Effect” means a material adverse effect on (a) the business, operations, affairs, Properties, condition (financial or otherwise), prospects, management or results of operations of (i) the Borrower Group taken as a whole or (ii) any member of the Borrower Group, individually, (b) the ability of the Borrower, any Subsidiary or any Guarantor to perform any of its obligations under any Loan Document, (c) the validity or enforceability of any Loan Document or (d) the rights and remedies of or benefits available to the Agent or any Lender under the Credit Agreement or any Loan Document.

“Material Agreements” has the meaning assigned such term in Section 8.25.

“Material Indebtedness” means Debt (other than the Loans) in a principal amount in excess of Twenty Five Thousand Dollars ($25,000), of any one or more members of the Borrower Group.

“Maturity Date” means the earlier to occur of (i) the twenty four (24) month anniversary of the Effective Date or (ii) the date the Term Loan or the Additional Loan is accelerated pursuant to Section 11.02.

“Moody’s” means Moody’s Investors Service, Inc. and any successor thereto that is a nationally recognized rating agency.

“Mortgages” means collectively each Deed of Trust, Fixture Filing, Assignment of As-Extracted Collateral, Security Agreement and Financing Statement dated of even date herewith by the Borrower or its Subsidiaries, as the Grantor, in favor of Samuel Gradess as Trustee, for the benefit of the Agent, as the Beneficiary, in the form of Exhibit F.

“Mortgaged Property” means any Property owned by a member of the Borrower Group, which is subject to the Liens existing and to exist under the terms of the Security Instruments.

“Multiemployer Plan” means a Plan which is a multiemployer plan as defined in section 3(37) or 4001 (a)(3) of ERISA.

“Notes” means collectively the Term Note and the Additional Note.

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“Oil and Gas Properties” means: (a) Hydrocarbon Interests; (b) the Properties now or hereafter pooled or unitized with Hydrocarbon Interests; (c) all presently existing or future unitization, pooling agreements and declarations of pooled units and the units created thereby (including without limitation all units created under orders, regulations and rules of any Governmental Authority) which may affect all or any portion of the Hydrocarbon Interests; (d) all Material Agreements, operating agreements, contracts and other agreements, including production sharing contracts and agreements, which relate to any of the Hydrocarbon Interests or the production, sale, purchase, exchange or processing of Hydrocarbons from or attributable to such Hydrocarbon Interests; (e) all Hydrocarbons in and under and which may be produced and saved or attributable to the Hydrocarbon Interests, including all oil in tanks, and all rents, issues, profits, proceeds, products, revenues and other incomes from or attributable to the Hydrocarbon Interests; (f) all tenements, hereditaments, appurtenances and Properties in any manner appertaining, belonging, affixed or incidental to the Hydrocarbon Interests and (g) all Properties, rights, titles, interests and estates described or referred to above, including any and all Property, real or personal, now owned or hereafter acquired and situated upon, used, held for use or useful in connection with the operating, working or development of any of such Hydrocarbon Interests or Property (excluding drilling rigs, automotive equipment, rental equipment or other personal Property which may be on such premises for the purpose of drilling a well or for other similar temporary uses) and including any and all oil wells, gas wells, injection wells or other wells, buildings, structures, fuel separators, liquid extraction plants, plant compressors, pumps, pumping units, field gathering systems, tanks and tank batteries, fixtures, valves, fittings, machinery and parts, engines, boilers, meters, apparatus, equipment, appliances, tools, implements, cables, wires, towers, casing, tubing and rods, surface leases, rights-of-way, easements and servitudes together with all additions, substitutions, replacements, accessions and attachments to any and all of the foregoing.

“OPA” has the meaning given such term in the definition of Environmental Laws.

“Operating Costs” means all actual lease operating costs (net to the Borrower and its Subsidiaries) associated with the direct operation of the Borrower and its Subsidiaries’ Oil and Gas Properties.

“OTCBB” means the OTC Bulletin Board.

“Other Taxes” means any and all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made hereunder or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement and any other Loan Document; other than Excluded Taxes.

“Participant” has the meaning assigned such term in Section 13.14(c)(i).

“Patriot Act” has the meaning assigned such term in Section 13.16.

“PBGC” means the Pension Benefit Guaranty Corporation, or any successor thereto.

“Person” means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other business entity.

“Plan” means any employee pension benefit plan, as defined in section 3(2) of ERISA, which (a) is currently or hereafter sponsored, maintained or contributed to by the Borrower, a Subsidiary or an ERISA Affiliate or (b) was at any time during the six (6) calendar years preceding the Effective Date, sponsored, maintained or contributed to by a member of the Borrower Group or an ERISA Affiliate.

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“Pledge Agreement” means an agreement between each holder of any Equity Interest in the Borrower and the Subsidiaries on the one hand, and the Agent, on the other hand, in substantially the form of Exhibit C, as the same may be amended, modified or supplemented from time to time, and “Pledge Agreements” means all of such agreements.

“Property” means any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible, including, without limitation, Cash, securities, accounts and contract rights.

“Proved Reserves” means those Oil and Gas Properties designated as proved (in accordance with the Definitions for Oil and Gas Reserves approved by the Board of Directors of the Society of Petroleum Engineers, Inc. from time to time) in the Reserve Report delivered to the Agent pursuant to this Agreement.

“PV 10 Value” means, with respect to any Proved Reserves, the aggregate net present value of such Oil and Gas Properties calculated before income taxes, but after reduction for royalties, lease operating expenses, severance and ad valorem taxes, Capital Expenditures and abandonment costs; with no escalation of Capital Expenditures or abandonment costs; discounted at 10%; using assumptions regarding future prices of Hydrocarbon sales on all unhedged volumes, adjusted for historical price differentials and BTU and quality adjustments; and with escalation of assumed lease operating expenses. The PV 10 Value shall be calculated and included as part of the Reserve Report, and such PV 10 Value shall remain in effect throughout the term of this Agreement.

“Quarterly Taxes” means the actual amount of federal income taxes that the members are required to pay based on the income of the Borrower for the respective fiscal quarter provided such amount shall not exceed the Consolidated Net Income of the Borrower for the applicable fiscal quarter multiplied by the highest marginal federal tax rate for an individual then in effect under the Code.

“Redemption” means with respect to any Debt, the repurchase, redemption, prepayment, repayment or defeasance (or the segregation of funds with respect to any of the foregoing) of such Debt.

“Redeem” has the correlative meaning thereto.

“Register” has the meaning assigned such term in Section 13.04(b)(iv).

“Related Parties” means, with respect to any specified Person, such Person’s Affiliates and the respective directors, officers, employees, agents and advisors (including attorneys, accountants and experts) of such Person and such Person’s Affiliates.

“Release” means any depositing, spilling, leaking, pumping, pouring, placing, emitting, discarding, abandoning, emptying, discharging, migrating, injecting, escaping, leaching, dumping, or disposing.

“Remedial Work” has the meaning assigned such term in Section 9.10(a).

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“Reserve Report” means the Initial Reserve Report and each other report, in form and substance satisfactory to the Agent in its sole discretion, as applicable (including, without limitation, the use of satisfactory methodologies and risk analyses), setting forth the Proved Reserves attributable to the Oil and Gas Properties of the Borrower Group. Each Reserve Report shall set forth volumes, projections of the future rate of production, Hydrocarbon prices, net proceeds of production, operating expenses, capital expenditures and PV 10 Value, in each case based upon updated economic assumptions reasonably acceptable to the Agent.

“Responsible Officer” means, as to any Person, the Chief Executive Officer, the President, any Financial Officer or any Vice President of such Person. Unless otherwise specified, all references to a Responsible Officer herein shall mean a Responsible Officer of the applicable member of the Borrower Group.

“Restricted Payment” means any dividend or other distribution (whether in Cash, securities or other Property) with respect to any Equity Interests in a member of the Borrower Group, 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 (i) any such Equity Interests in a member of the  Borrower Group or (ii) any option, warrant or other right to acquire any such Equity Interests in a member of the Borrower Group.

“Roth” has the meaning assigned such term in Section 4.04.

“SEC” means the Securities and Exchange Commission or any successor Governmental Authority.

“Securities Laws” means the securities legislation and regulations of, and the instruments, policies, rules, orders, codes, notices and interpretation notes of the securities regulatory authorities (including the market or exchange on which the Common Shares are quoted or listed) of, the applicable jurisdiction or jurisdictions collectively.

“Security Instruments” means the Guarantee and Collateral Agreement, the Pledge Agreements, the Letters-in-Lieu, the Mortgages and any other mortgages, deeds of trust and other agreements, instruments or certificates described or referred to in Exhibit D, and any and all other agreements, guarantees, instruments or certificates now or hereafter executed and delivered by the Borrower Group or any other Person in connection with, or as security for the payment or performance of the Indebtedness, the Notes and this Agreement, as such instruments and agreements may be amended, modified, supplemented or restated from time to time.

“S&P” means Standard & Poor’s Ratings Group, a division of The McGraw-Hill Companies, Inc., and any successor thereto that is a nationally recognized rating agency.

“SPE Definitions” means, with respect to any term, the definition thereof adopted by the Board of Directors, Society for Petroleum Engineers (SPE) Inc., March 1997.

“SPE/SEC Standards” means the more restrictive of the standards and/or definitions, as determined by the Agent, set forth by (a) the SEC and (b) the Society of Petroleum Engineers or the SPE Definitions.

“Stock Grant” has the meaning assigned such term in Section 9.16(a).

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“Structuring Fee” means the fee payable by the Borrower to the Lenders in immediately available funds equal to two percent (2%) of the principal amount of the Term Loan and, if advanced, two percent of the principal amount of the Additional Loan (i.e., the Additional Funded Amount).

“Subsidiary” means: (a) any Person of which at least a majority of the outstanding Equity Interests having by the terms thereof ordinary voting power to elect a majority of the board of directors, managers or other governing body of such Person (irrespective of whether or not at the time Equity Interests of any other class or classes of such Person shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by a member of the Borrower or one or more of its Subsidiaries and (b) any partnership of which any member of the Borrower Group is a general partner. Unless otherwise indicated herein, each reference to the term “Subsidiary” shall mean a Subsidiary of the Borrower as well as a Subsidiary of any Subsidiary of the Borrower.

“Synthetic Leases” means, in respect of any Person, all leases which shall have been, or should have been, in accordance with GAAP, treated as operating leases on the financial statements of the Person liable (whether contingently or otherwise) for the payment of rent thereunder and which were properly treated as indebtedness for borrowed money for purposes of U.S. federal income taxes, if the lessee in respect thereof is obligated to either purchase for an amount in excess of, or pay upon early termination an amount in excess of, eighty (80%) of the residual value of the Property subject to such operating lease upon expiration or early termination of such lease.

“Taxes” means any and all present or future taxes, levies, imposts, duties, deductions, charges or withholdings imposed by any Governmental Authority.

“Term Loan” has the meaning assigned such term in Section 2.01.

“Term Loan Interest Rate” means interest on the principal of the Term Loan and (to the fullest extent permitted by law) on any fees and other amounts payable by the Borrower hereunder, under the Term Note or under any other Loan Document for the period commencing on the first day after the period ending on the nine (9) month anniversary of the Effective Date through the date the Term Loan shall be paid in full, equal to either: (i) sixteen percent (16%) per annum where the average net monthly oil and gas production revenues at GBE for the trailing three (3) month period is less than Nine Hundred Thousand Dollars ($900,000); or (ii) fourteen percent (14%) per annum where the average net monthly oil and gas production revenues at GBE for the trailing three (3) month period is equal to or greater than Nine Hundred Thousand Dollars ($900,000); and in no event to exceed the Highest Lawful Rate.

“Term Note” means the term loan note of the Borrower described in Section 2.04, together with all amendments, modifications, replacements, extensions and rearrangements thereof.

“Total Proved Reserves” shall be as defined in the SPE/SEC Standards.

“Transactions” means, with respect to (a) the Borrower, the execution, delivery and performance by the Borrower of this Agreement and each other Loan Document to which it is a party, the borrowing of the Loan, the use of the proceeds thereof, and the grant of Liens by the Borrower on Mortgaged Properties and other Properties pursuant to the Security Instruments and (b) each Guarantor, the execution, delivery and performance by such Guarantor of each Loan Document to which it is a party, its guarantee of the Indebtedness and other obligations and its grant of Liens on Mortgaged Properties and other Properties pursuant to the Security Instruments.

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“Uniform Commercial Code” means the Uniform Commercial Code presently in effect in the State of New York, as the same may be amended from time to time, and any successor statute thereto, except to the extent that the Uniform Commercial Code of some other jurisdiction applies mandatorily.

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ARTICLE II

Loan; Proceeds; Note; Security Interest.

 

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ARTICLE III

Repayment of Loan.

 

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ARTICLE IV

Payments; Fees.

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ARTICLE V

Increased Costs; Taxes.

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and the result of any of the foregoing shall be to increase the cost to the Lender of making or maintaining the Loans (or of maintaining its obligation to make the Additional Loan) or to reduce the amount of any sum received or receivable by the Lender (whether of principal, interest or otherwise), then the Borrower will pay to the Lender such additional amount or amounts as will compensate the Lender for such additional costs incurred or reduction suffered.

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ARTICLE VI

Account Procedures; Casualty Proceeds.

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ARTICLE VII

Conditions Precedent.

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ARTICLE VIII

The Borrower represents and warrants to the Lenders that:

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ARTICLE IX

Affirmative Covenants.

The Borrower covenants and agrees that until the principal of and interest on each Loan and all fees payable hereunder and all other amounts payable under the Loan Documents shall have been paid in full, the Borrower shall perform all covenants in this Article IX applicable to such Person:

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Each notice delivered under this Section 9.02 shall be accompanied by a statement of a Responsible Officer setting forth the details of the event or development requiring such notice and any action taken or proposed to be taken with respect thereto.

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Each such conveyance of Shares shall be apportioned among the Lenders in proportion to the relative size of each Lender’s Commitment Amount, after giving effect to any effective Assignment and Assumption, as reflected in an updated Annex I, with any rounding to be determined by the Agent.

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ARTICLE X

Negative Covenants.

Until the principal of and interest on each Loan and all fees payable hereunder and all other amounts payable under the Loan Documents have been paid in full, the Borrower will perform, and will cause each of the other members of the Borrower Group (as applicable) to perform all covenants in this Agreement applicable to such Person.

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ARTICLE XI

Events of Default; Remedies.

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(ii) any member of the Borrower Group shall fail to observe or perform any covenant, condition or agreement contained in Article X; provided, that with respect to such a failure with respect to Sections 10.03, 10.12, and 10.17, such failure shall continue unremedied for a period of ten calendar days after the earlier of (1) receipt by Borrower of notice from Agent of the foregoing or (2) actual knowledge of the foregoing on the part of any officer of any member of the Borrower Group.

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ARTICLE XII

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ARTICLE XIII

 

ARTICLE XIV

Miscellaneous.

if to the Borrower:

Hydrocarb Energy Corporation

800 Gessner, Suite 375

Houston, TX 77024

Attention: Charles Dommer

Facsimile: 713.970.1591

Email: cdommer@hydrocarb.com

With a copy to (which copy shall not constitute notice):

James Wes Christian

Christian, Smith & Jewell, L.L.P.

2302 Fannin, Suite 500

Houston, TX 77002

Facsimile: 713.659.7641

Email: jchristian@csj-law.com

 

Shadow Tree Capital Management LLC

7 Renaissance Square, 5th Floor

White Plains, NY 10601

Attention: Eric Keiter

Facsimile:

Email: ekeiter@shadowtreecapital.com

With a copy to (which copy shall not constitute notice):

Marino Partners LLP

15 Fisher Lane, Suite. 200

White Plains, NY 10528

Attention: Alexandra Lyras

Facsimile: 914.368.4527

Email: alyras@marinollp.com

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(A)

except in the case of an assignment to a Lender or an Affiliate of a Lender or an assignment of the entire remaining amount of the assigning Lender’s Commitment Amount, the Commitment Amount of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Assumption with respect to such assignment is delivered to the Agent) shall not be less than $200,000 unless the Agent otherwise consents;

(B)

each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender’s rights and obligations under this Agreement;

(C)

the parties to each assignment shall execute and deliver to the Agent an Assignment and Assumption, together with any such processing and recordation fee as Agent may require (it being recognized that the Borrower shall not be responsible for such processing and recordation fee).

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[Signature Page to Follow]

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the Effective Date.

 

 

[Signature Page to Credit Agreement]

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ANNEX I

to

 

LENDERS AND COMMITMENT AMOUNTS

 

 

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