Exhibit 10.44

 

 

REVOLVING CREDIT AND SECURITY AGREEMENT

 

By and Between

 

COMPASS BANK

 

And

 

TORNIER, INC.

 

MAY 31, 2007

 

 

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TABLE OF CONTENTS

 

SECTION 1.

 

The Credit Facilities

2

1.1

 

Bank’s Agreement to Make Advances under the Revolving Line

2

1.2

 

Bank’s Agreement to Fund the Term Loan

3

1.3

 

The Incorporation of the Real Estate Loan in this Agreement

4

 

 

 

 

SECTION 2.

 

Borrower’s Representations and Warranties; Certain Covenants

4

2.1

 

Organization, Licenses, Qualifications, Etc.

4

2.2

 

Power and Authority; Enforceability

4

2.3

 

Liens

4

2.4

 

Payment of Taxes, Charges, Etc.

4

2.5

 

Restrictions on Transfer of Collateral

5

2.6

 

Reporting Requirements

5

2.7

 

Additional Representations Regarding Accounts

6

2.8

 

Additional Representations Regarding Instruments, Chattel Paper, Etc.

7

2.9

 

Location of Collateral

7

2.10

 

Location of Records

7

2.11

 

Additional Representations Regarding Financial Statements

7

2.12

 

Possession of and Insurance on Equipment

7

2.13

 

Borrower’s Names and Offices

7

2.14

 

Additional Representations Regarding Absence of Defaults Under Other Agreements

7

2.15

 

Indemnification

7

2.16

 

Taxes, Charges and Expenses Incurred with Respect to Revolving Line

8

2.17

 

Patents, Copyrights, Trademarks and Licenses

8

2.18

 

Judgments/Actions

8

2.19

 

Margin Stock

8

2.20

 

No Untrue Statements or Omissions

9

2.21

 

Bankruptcy

9

2.22

 

Organizational Identification Number, Etc.

9

 

 

 

 

SECTION 3.

 

Inspection of Records; Further Assurance

9

 

 

 

 

SECTION 4.

 

Security Interest of Bank in Collateral

9

4.1

 

Collateral

9

4.2

 

Security Interest in Collateral Created/Acquired Hereafter

10

4.3

 

Further Assurances

11

4.4

 

Additional Further Assurances

11

4.5

 

Restrictions on Pledging, Mortgaging Collateral

11

 

 

 

 

SECTION 5.

 

Collection of Accounts Receivable

12

5.1

 

Collection and Application of Proceeds; Notifying Account Debtors

12

5.2

 

Collection of Accounts

12

 

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SECTION 6.

 

Additional Affirmative Covenants

12

6.1

 

[Intentionally deleted]

12

6.2

 

Insurance

12

6.3

 

Compliance with Laws

13

6.4

 

Debt Service Coverage

13

6.5

 

Tangible Net Worth

13

6.6

 

Total Debt to Tangible Net Worth

14

6.7

 

Fees

14

6.8

 

Notification of Defaults, Suits, Etc.

14

6.9

 

Deposit Account

14

 

 

 

 

SECTION 7.

 

Additional Negative Covenants

14

7.1

 

Liens

14

7.2

 

[Intentionally deleted]

14

7.3

 

Dividends; Bonuses

14

7.4

 

Acquiring Assets, Etc. of Other Entities

15

7.5

 

Dissolution, Mergers, Change in Nature

15

7.6

 

Subordinated Debt

15

7.7

 

Loans to Related Parties and Affiliates

15

 

 

 

 

SECTION 8.

 

Events of Default; Acceleration

15

 

 

 

 

SECTION 9.

 

Power to Sell or Collect Collateral

17

 

 

 

 

SECTION 10.

 

Set Off

18

 

 

 

 

SECTION 11.

 

Waivers

18

 

 

 

 

SECTION 12.

 

Expenses; Proceeds of Collateral

19

 

 

 

 

SECTION 13.

 

Duration; Extension

19

 

 

 

 

SECTION 14.

 

General

20

 

 

 

 

SECTION 15.

 

Miscellaneous

21

 

 

 

 

SECTION 16.

 

Compliance With Laws

22

 

 

 

 

SECTION 17.

 

USA Patriot Act

23

 

 

 

 

SECTION 18.

 

ENTIRE AGREEMENT

23

 

 

 

 

Addendum A Definitions

 

 

 

Exhibit A — Accounts Receivable and Inventory Reconciliation

 

Exhibit B — Certificate

 

 

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REVOLVING CREDIT AND SECURITY AGREEMENT

 

This Revolving Credit and Security Agreement (as may be amended, this
“Agreement”) is executed and delivered as of this 31st day of May, 2007, by and
between TORNIER, INC., a Delaware corporation (“Borrower”), with its chief
executive office and its principal place of business at 12875 Capricorn Drive,
Stafford, Texas 77477 and COMPASS BANK, an Alabama banking corporation (“Bank”),
with its principal place of business at 24 Greenway Plaza, Suite 1601, Houston,
Texas 77046.  Borrower has applied to Bank for (a) a revolving line of credit
not to exceed an aggregate principal amount at any one time outstanding the sum
of SIX MILLION AND NO/100 DOLLARS ($6,000,000.00) (as the same may be amended,
the “Revolving Line”) to be evidenced by a Master Revolving Promissory Note (as
the same may be amended, the “Revolving Note”) in such amount and (b) an
advancing term loan in an amount not to exceed at any one time outstanding the
sum of TWO MILLION FIVE HUNDRED THOUSAND AND NO/100 DOLLARS ($2,500,000.00) (as
the same may be amended, the “Term Loan”) to be evidenced by a Promissory Note
(as the same may be amended, the “Term Note”) in such amount.  Borrower, as the
successor in interest by merger, to A.T. Real Estate, Inc., a Texas corporation,
entered into that certain real estate term loan dated August 29, 2005 with Bank
(as the same may be amended, the “Real Estate Loan”) in the original principal
amount of ONE MILLION SIX HUNDRED FORTY THOUSAND AND NO/100 DOLLARS
($1,640,000.00) evidenced by that certain Promissory Note dated August 29, 2005
in such amount, as modified by that certain Modification to Note and Deed of
Trust dated as of June 15, 2006 and that certain Modification Agreement dated as
of June 15, 2006 and to be modified by that certain Second Modification to Note,
Deed of Trust and Assignment of Rents (as the same has been and may be amended,
the “Real Estate Note,” and together with the Revolving Note and the Term Note,
collectively, the “Notes”).  Each of the Notes is secured by a lien on and a
security interest in all of the Collateral (as defined herein) on the terms
hereinafter set forth.

 

Bank is willing to extend the Revolving Line and the Term Loan to Borrower up to
an aggregate principal amount not in excess of the amounts set forth above, and
modify the existing Real Estate Loan evidenced by the Real Estate Note, upon the
security of the Collateral on the terms and subject to the conditions
hereinafter set forth to refinance some of Borrower’s existing indebtedness and
to provide Borrower with ordinary working capital.

 

Accordingly, Borrower and Bank, in consideration of the premises, the credit to
be extended hereunder, and other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, agree to amend and restate, in
their respective entirities, that certain Revolving Credit and Security
Agreement dated February 15, 2005, between Borrower and Bank, as amended, and
that certain Loan Agreement dated as of August 29, 2005 between Borrower (then
known as A.T. Real Estate, Inc., a Texas corporation) and Bank, as amended, as
follows:

 

Capitalized terms not otherwise defined herein shall have the meaning attributed
to the same in Addendum A hereto incorporated herein by reference as if fully
set forth.

 

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SECTION 1.         The Credit Facilities.

 

1.1          Bank’s Agreement to Make Advances under the Revolving Line.

 

(a)           Revolving Line; Borrowing Base.  From the date hereof until the
first to occur of (i) Bank’s demand for payment or (ii) May 31, 2008 (whichever
shall occur first being the “Revolving Line Maturity Date”), or such future date
to which the Maturity Date of the Revolving Line may be extended (any such
extension to be at Bank’s sole discretion and evidenced by a writing executed by
Bank), subject to the terms and conditions of this Agreement and Borrower’s and
all guarantor’s (as applicable) performance of and compliance with each of the
Loan Documents, and so long as no event of default or Event of Default
(including, without limitation, the breach of any warranty or representation)
hereunder or under any of the other Loan Documents shall have occurred, be
continuing or would result, Bank agrees to extend to Borrower an open-end credit
line (also referred to as the Revolving Line) on the basis of the following
advance formula (such advance formula being hereinafter referred to as the
“Borrowing Base”):  an amount equal to (a) eighty percent (80%) of the
outstanding value of Borrower’s Eligible Accounts Receivable; provided, however,
that in no event shall the aggregate sum of all principal advances made by Bank
to Borrower at any one time outstanding hereunder exceed the sum of
$6,000,000.00.  Within such limits and subject to the terms of this Agreement,
Borrower may borrow, repay without penalty or premium, and reborrow hereunder,
from the date of this Agreement until the Maturity Date.  It is expressly
understood and agreed that Bank shall have no obligation to make an advance
under the Revolving Line if the amount of such advance together with the amount
outstanding under the Revolving Line exceeds or would exceed the lesser of
(i) $6,000,000.00 or (ii) the Borrowing Base.  In addition to the foregoing
requirements, Bank shall not be under any obligation to make any advance under
this Agreement until Bank has received all executed Loan Documents and all
Bank’s closing conditions have been satisfied in Bank’s sole discretion.

 

If at any time Borrower is not entitled to any advances by the terms of this
Agreement, Bank may, in its sole discretion, make requested advances; however,
it is expressly acknowledged and agreed that, in such event, Bank shall have the
right, in its sole discretion, to decline to make any requested advance and to
require any payment required under the terms of the Agreement without prior
notice to Borrower and the making of any such advances shall not be construed as
a waiver of such right by Bank.

 

(b)           Borrower’s Revolving Loan Account.  All borrowings/advances under
the Revolving Line shall be evidenced by the Note and Bank shall enter such
borrowings/advances as debits to Borrower’s Revolving Loan Account.  Bank shall
also record in Borrower’s Revolving Loan Account all other charges, expenses and
items properly chargeable to Borrower hereunder (which shall also be evidenced
by the Revolving Note), all payments made by Borrower on account of indebtedness
under the Revolving Line and other appropriate debits and credits.  The debit
balance of Borrower’s Revolving Loan Account shall also be evidenced by the
Revolving Note and shall reflect the amount of Borrower’s indebtedness to Bank
from time to time hereunder.

 

(c)           Exceeding Borrowing Base.  If at any time the outstanding balance
of Borrower’s Revolving Loan Account attributable to the Revolving Line exceeds
the lesser of (i) the Borrowing Base, or (ii) $6,000,000.00, then Borrower shall
not be entitled to any additional advances under the Revolving Line while such
excess exists and shall immediately remit to Bank immediately available funds
sufficient to eliminate such excess and, if Bank requests, deliver to Bank
additional collateral of a value and character satisfactory to Bank.  If the
Borrowing Base Report (as defined in Section 2.6) indicates that the outstanding
balance of Borrower’s Revolving Loan Account attributable to the Revolving Line
or advances made to Borrower hereunder exceeds the lesser of

 

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(i) the Borrowing Base or (ii) $6,000,000.00, then Borrower shall not be
entitled to any additional advances under the Revolving Line while such excess
exists and shall immediately remit to Bank (with the relevant Borrowing Base
Report) immediately available funds in the amount sufficient to eliminate such
excess.

 

(d)           Discretionary Advances.  In the event that the availability of the
Revolving Line hereunder expires by the terms of this Agreement, or by the terms
of any agreement extending the Revolving Line Maturity Date of the Revolving
Line, Bank may, in its sole discretion, make requested advances; however, it is
expressly acknowledged and agreed that, in such event, Bank shall have the
right, in its sole discretion, to decline to make any requested advance and may
require payment in full of Borrower’s Loan Account attributable to the Revolving
Line at any time without prior notice to Borrower and the making of any such
advances shall not be construed as a waiver of such right by Bank.  Nothing in
this Section 1 shall be deemed to extend the availability of the Revolving Line
beyond the time noted in Section 13 hereof.

 

1.2          Bank’s Agreement to Fund the Term Loan.

 

(a)           Term Loan.  Subject to the terms and conditions of this Agreement,
Bank agrees to make the Term Loan to Borrower in the principal amount of
$2,500,000.00 in multiple advances from the date hereof until May 31, 2008. 
Advances under the Term Loan shall be (a) in minimum amounts of $250,000.00 (or
such lesser amount equal to the undivided portion of the Term Loan remaining
unfunded) and (b) used to fund the purchase price of equipment in an amount of
up to one hundred percent (100%) of the invoice amount thereof.  No amounts
repaid under the Term Loan may be reborrowed hereunder.  All requests for
advances of any portion of the Term Loan shall be accompanied by an Advance
Request Form (herein so called) in substantially the form of Exhibit C attached
hereto properly signed and completed.

 

(b)           Term Note.  The obligation of Borrower to repay the Term Loan
shall be evidenced by the Term Note executed by Borrower, payable to the order
of Bank, in the principal amount of $2,500,000.00.

 

(c)           Interest.  The Term Loan shall bear interest at the rate of
interest set forth in the Term Note.

 

(d)           Repayment of Principal and Interest.  The principal of and
interest on the Term Loan shall be due and payable by Borrower as follows:

 

(i)            Twelve (12) monthly installments each in the amount of accrued
interest on the Term Loan shall be due and payable on the fifth (5th) day of
each month, commencing on June 5, 2007 and continuing through and including
May 5, 2008; and thereafter.

 

(ii)           Thirty-five (35) monthly installments each in the principal
amount determined by Bank necessary to amortize the principal amount Term Loan
over a three (3) year period, plus accrued and unpaid interest on the Term Loan,
shall be due and payable on the fifth (5th) day of each month, commencing on the
June 5, 2008 and continuing through and including April 5, 2011; and thereafter.

 

(iii)          A final installment in the amount of all outstanding principal of
the Term Loan, plus accrued and unpaid interest on the Term Loan, shall be due
and payable in full on May 5, 2011.

 

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1.3          The Incorporation of the Real Estate Loan in this Agreement.

 

(a)           Real Estate Note.  From and after the date of this Agreement, the
Real Estate Note shall be governed by the terms and conditions of this Agreement
and shall be evidenced by the Real Estate Note as if originally executed and
delivered pursuant to the terms of this Agreement.

 

(b)           Interest.  The Real Estate Loan shall bear interest at the rate of
interest set forth in the Real Estate Note.

 

(c)           Repayment of Principal and Interest.  The principal and interest
on the Real Estate Loan shall be due and payable by Borrower as set forth in the
Real Estate Note.

 

SECTION 2.         Borrower’s Representations and Warranties; Certain Covenants.

 

To induce Bank to enter into this Agreement, Borrower represents, warrants and
covenants as follows:

 

2.1          Organization, Licenses, Qualifications, Etc.  Borrower (a) is a
duly organized corporation, validly existing, and in good standing under the
laws of the State of Delaware; (b) has all necessary licenses and corporate
power and authority to own its assets and conduct its business as now conducted
or presently proposed to be conducted; (c) has no subsidiaries; and (d) is duly
qualified and in good standing (and will remain so qualified and in good
standing) in every jurisdiction in which it is or shall be doing business or in
which the failure to so qualify and remain in good standing would or could have
an adverse effect on its business or properties, the Collateral or Bank.

 

2.2          Power and Authority; Enforceability.  The execution, delivery and
performance hereof are within Borrower’s corporate powers, have been duly and
validly authorized and are not in contravention of the law or the terms of
Borrower’s charter, by-laws or other incorporation papers, or of any indenture,
agreement, or undertaking or any law, regulation or order to which Borrower is a
party or by which it or any of its properties is or may be bound.  Upon
execution and delivery hereof, this Agreement will be a valid and binding
obligation of Borrower enforceable in accordance with its terms.  This
Agreement, the Note and all other Loan Documents executed by Borrower have been
validly executed and delivered by Borrower and constitute legal, valid, and
binding obligations of Borrower enforceable against Borrower in accordance with
their respective terms, except as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or similar laws at the time in effect affecting the
rights of creditors generally.

 

2.3          Liens.  Except for the Permitted Liens and the security interests
granted to Bank hereby or by any of the other Loan Documents in favor of Bank,
Borrower is and, as to Accounts Receivable, Inventory and other Collateral
arising or to be acquired after the date hereof, shall be the sole and exclusive
owner of the Accounts, the Inventory and each and every other item of Collateral
free from any lien, claim, charge, security interest, mortgage, secondary
financing or encumbrance, and Borrower shall defend the Accounts, the Inventory
and each and every other item of Collateral and all Proceeds and products
thereof against all claims and demands of all persons at any time claiming the
same or any interest therein adverse to the interests of Bank.

 

2.4          Payment of Taxes, Charges, Etc.  Borrower will promptly pay all
taxes or charges levied on or with respect to, and will at all times keep the
Accounts, the Inventory and each and every other item of Collateral, free and
clear of all liens, claims, charges, security interests, mortgages, secondary
financing and encumbrances whatsoever, other than the Permitted Liens and

 

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the security interests granted to Bank hereby or by any of the other Loan
Documents.  Borrower agrees to take all actions that Bank may request to
establish and maintain a valid title and security interest in the Accounts, the
Inventory and each and every other item of Collateral, free and clear of all
other liens, claims, charges, security interests, mortgages, secondary financing
and encumbrances whatsoever (other than the Permitted Liens), including, without
limitation, the payment of any amounts, taxes, assessments, fees and/or charges
necessary to perfect and note Bank’s interest in the same.  If such amounts,
taxes, assessments, fees and/or charges remain unpaid after the date fixed for
the payment of same, or if any lien, claim, charge, security interest, mortgage,
secondary financing or encumbrance shall arise, or be claimed or asserted with
respect to the Accounts, the Inventory or any other item of Collateral, Bank
may, without notice to Borrower, pay such taxes, assessments, charges or claims,
or take any and all other actions (including the payment of money) deemed
desirable by Bank to remove any such lien, claim, charge, security interest,
mortgage, secondary financing or encumbrance, and Borrower agrees that the
amounts thereof, along with any amounts necessary to perfect and note Bank’s
interest in any Collateral, shall be charged to Borrower’s Loan Account
described herein and shall bear interest at the rate of interest borne by
Borrower’s obligations under the Note.

 

2.5          Restrictions on Transfer of Collateral.  Borrower will not (and
will not allow or suffer any other person or entity to) sell (except for the
sale of Inventory in the normal and ordinary course of Borrower’s business),
transfer, lease, convey or otherwise dispose of the Collateral, any portion
thereof, or any interest therein (or any of the Proceeds thereof, including,
without limitation, money, checks, money orders, drafts, notes, instruments,
documents, chattel paper, Accounts, returns or repossessions), without Bank’s
prior written consent.

 

2.6          Reporting Requirements.  Borrower will deliver to Bank, so long as
any of the Liabilities shall remain outstanding, the following:

 

(a)           monthly, on or before the twentieth (20th) day of each calendar
month or more often as Bank shall request, (i) a Borrowing Base Report (herein
so called) in substantially the form of Exhibit A attached hereto, (ii) detailed
agings reports in form acceptable to Bank of all Borrower’s Accounts Receivable
and accounts payable as of the last day of the immediately preceding calendar
month (or such shorter applicable period), and the period of time which has
elapsed with respect to such Accounts Receivable and accounts payable since the
invoice date with respect thereto (together with Borrower’s certification as to
any counterclaims, offsets or contra-accounts with respect to any of Borrower’s
Accounts); (iii) if requested by Bank, summaries of all Borrower’s Inventory as
of the last day of the immediately preceding calendar month (or such shorter
applicable period), and the value thereof; and (iii) if requested by Bank, a
copy of Borrower’s sales journal or invoice register for the immediately
preceding calendar month (or such shorter applicable period) and the dates,
amounts and Account Debtors with respect to such billings;

 

(b)           if requested by Bank, promptly upon any reduction or diminution in
the face value of any Account Receivable in excess of $2,000.00, Borrower shall
advise Bank thereof and, if Bank requests, Borrower shall provide Bank with a
signed writing explaining the circumstances resulting in such reduction; and
further, immediately upon production thereof, copies of all Borrower’s credit
memos shall be forwarded to Bank;

 

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(c)           Borrower shall submit or cause to be submitted to Bank
(i) Borrower’s and Tornier US Holdings, Inc.’s internally prepared consolidated
and consolidating quarterly financial statements within forty-five (45) days
after the close of each fiscal quarter in each fiscal year including a balance
sheet as of the close of such period, an income statement, and such other
statements containing financial information which Bank reasonably may require,
prepared and analyzed in accordance with generally accepted accounting
principles and attested to by an authorized officer of Borrower; (ii) Borrower’s
and Tornier US Holdings, Inc.’s consolidated and consolidating audited fiscal
year-end financial statements (in form, preparation and substance acceptable to
Bank) within ninety (90) days after the close of each of its fiscal years
(provided, however, that Borrower’s audited consolidated financial statements
for the fiscal year ending December 31, 2006 shall not be required to be
delivered to Bank until June 30, 2007), including a balance sheet as of the
close of such period, an income statement, a reconciliation of stockholders’
equity, and a statement of cash flows, all certified by an independent certified
public accountant acceptable to Bank and analyzed in accordance with generally
accepted accounting principles; (iii) together with each delivery of financial
statements required above, the certificate of Borrower substantially in the form
of Exhibit B hereto signed by the president or any other officer of Borrower
acceptable to Bank stating, among other things, that no event has occurred which
constitutes an event of default or would constitute an event of default but for
the requirement that notice be given, or time elapse or both, under any loans,
notes, debentures, bonds, leases, or other obligations of Borrower then
outstanding, including, but not limited to, this Agreement (such certificate
shall publish the accounting calculations used to determine compliance or
noncompliance with Borrower’s financial obligations and financial covenants,
including those provided in this Agreement), or, if any such event of default or
defaults exists, specifying the nature thereof; and (iv) such other financial
and related information when and as requested by Bank regarding Borrower, the
Collateral, Tornier US Holdings, Inc. and any endorser, guarantor or surety of
any of the Liabilities of Borrower to Bank.

 

(d)           such other documents, instruments, data or information of any type
requested by Bank with respect to the Accounts Receivable, Inventory and any
other Collateral.

 

2.7          Additional Representations Regarding Accounts.  At the time any
Account becomes subject to a security interest in favor of Bank, said Account
shall be a good and valid Account representing an undisputed, bona fide
indebtedness incurred by the Account Debtor named therein, for merchandise held
subject to delivery instructions or theretofore shipped or delivered pursuant to
a contract of sale; or for services theretofore performed by Borrower with or
for said Account Debtor; there shall be no set-offs, counterclaims, or disputes
against any such Account except as indicated in some written list, statement or
invoice furnished to Bank with reference thereto; and Borrower shall be the
lawful owner of all such Accounts and shall have good right to subject the same
to a security interest in favor of Bank.  No such Account shall be sold,
assigned, or transferred to any person other than Bank or in any way encumbered
except to Bank, and Borrower shall defend the same against the lawful claims and
demands of all persons other than Bank.  If any Account shall be in violation of
(a) any one or more of the warranties expressed in this section or (b) any of
the requirements to be an Eligible Account Receivable, it shall not be deemed an
Eligible Account Receivable for purposes of this Agreement.

 

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2.8          Additional Representations Regarding Instruments, Chattel
Paper, Etc.  At the time Borrower pledges, sells, assigns or transfers to Bank
any instrument, document of title, security, chattel paper or other property, or
any interest therein, Borrower shall be the lawful owner thereof and shall have
good right to pledge, sell, assign or transfer the same; none of such property
shall have been pledged, sold, assigned or transferred to any person other than
Bank or in any way encumbered (except for the Permitted Liens), and Borrower
shall defend the same against the lawful claims and demands of all persons other
than Bank.

 

2.9          Location of Collateral.  Except for Inventory sold in the ordinary
course of business, all Inventory and other tangible Collateral have always
been, are and shall continue to be kept at Borrower’s principal place of
business as noted on the first page of this Agreement.

 

2.10        Location of Records.  All records of Borrower pertaining to Accounts
Receivable, general intangibles and contract rights have always been, are and
shall continue to be kept at Borrower’s chief executive office as noted on the
first page of this Agreement.

 

2.11        Additional Representations Regarding Financial Statements.  Subject
to any limitations stated therein or in connection therewith, all balance
sheets, earnings statements and other financial data which have been or may
hereafter be furnished to Bank to induce it to enter into this Agreement, to
extend credit from time to time hereunder, or otherwise furnished in connection
herewith, do or shall fairly represent the financial condition of Borrower (or
other persons or entities, as applicable) as of the dates and results of
operations for the periods for which the same are furnished in accordance with
generally accepted accounting principles consistently applied, and all other
information, reports and other papers and data furnished to Bank shall be
accurate, as of the relevant date, and correct in all material respects and
complete insofar as completeness may be necessary to give Bank a true and
accurate knowledge of the subject matter.

 

2.12        Possession of and Insurance on Equipment.  With respect to any and
all equipment which may now or hereafter constitute Collateral hereunder,
Borrower shall maintain possession of same, keep the same in good repair, and
maintain casualty insurance on the same naming Bank as additional insured and
Bank loss payee under a Bank loss payee endorsement.

 

2.13        Borrower’s Names and Offices.  Borrower’s name, chief executive
office and principal place of business are and always have been as set forth on
the first page of this Agreement, except as otherwise disclosed in writing to
Bank.  Borrower will promptly advise Bank in writing sixty (60) days prior to
any change in Borrower’s name, place of organization, organizational
identification number, chief executive office or principal place of business.

 

2.14        Additional Representations Regarding Absence of Defaults Under Other
Agreements.  Borrower is not now and will not be in default under any agreement
evidencing an obligation for the payment of money, performance of a service or
delivery of goods, demand for performance under which, or acceleration of the
maturity of which would render Borrower insolvent or unable to meet its other
debts as they become due or conduct its business as usual.

 

2.15        Indemnification.  BORROWER HEREBY INDEMNIFIES BANK AND EACH
AFFILIATE THEREOF AND THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, ATTORNEYS
AND AGENTS FROM, AND HOLDS EACH OF THEM HARMLESS AGAINST, ANY AND ALL LOSSES,
LIABILITIES, CLAIMS, DAMAGES, PENALTIES, JUDGMENTS, DISBURSEMENTS, COSTS AND
EXPENSES (INCLUDING ATTORNEYS’ FEES) (COLLECTIVELY, “CLAIMS”) TO WHICH ANY OF
THEM MAY BECOME SUBJECT WHICH DIRECTLY OR INDIRECTLY ARISE FROM OR RELATE TO
(A) THE

 

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NEGOTIATION, EXECUTION, DELIVERY, PERFORMANCE, ADMINISTRATION OR ENFORCEMENT OF
ANY OF THE LOAN DOCUMENTS, (B) ANY OF THE TRANSACTIONS CONTEMPLATED BY.  THE
LOAN DOCUMENTS, (C) ANY BREACH BY BORROWER OF ANY REPRESENTATION, WARRANTY,
COVENANT OR OTHER AGREEMENT CONTAINED IN ANY OF THE LOAN DOCUMENTS, (D) THE
PRESENCE, RELEASE, THREATENED RELEASE, DISPOSAL, REMOVAL OR CLEANUP OF ANY
HAZARDOUS SUBSTANCE LOCATED ON, ABOUT, WITHIN OR AFFECTING ANY OF THE PROPERTIES
OR ASSETS OF BORROWER OR ANY SUBSIDIARY, (E) ANY ACT OR OMISSION OF BANK BASED
UPON ANY FAX OR ELECTRONIC TRANSMISSION OR, INCLUDING, WITH RESPECT TO ALL OF
THE ABOVE, ANY CLAIM WHICH ARISES AS A RESULT OF THE NEGLIGENCE OF BANK;
PROVIDED, HOWEVER, THAT BORROWER’S INDEMNIFICATION OBLIGATIONS UNDER THIS
SECTION SHALL NOT APPLY TO THE EXTENT THAT THE CLAIMS ARISE AS A RESULT OF THE
GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF ANY INDEMNIFIED PERSON.

 

2.16        Taxes, Charges and Expenses Incurred with Respect to Revolving
Line.  Borrower will pay any and all taxes (with the exception of taxes measured
by income), charges and expenses of every kind or description paid or incurred
by Bank under or with respect to the Revolving Line, the Loan Documents, any
advances hereunder or any Collateral therefor or the collection of or
realization upon the same.  Borrower hereby authorizes Bank to debit such and
all other taxes, charges and expenses provided for in this Agreement (including,
without limitation, those taxes, charges and expenses for which Borrower is
liable under Section 12) to Borrower’s Loan Account.

 

2.17        Patents, Copyrights, Trademarks and Licenses.  None of the
Collateral is patented, copyrighted, copyrightable, licensed or trademarked by
Borrower or incorporates or is subject, in whole or part, to any copyright,
license, patent or trademark in favor of Borrower or any of its affiliates. 
Prior to the time any Collateral is copyrighted, licensed, patented or
trademarked or incorporates or is subjected, in whole or in part, to any
copyright, license, patent or trademark, Borrower shall notify Bank and shall
take (or cause to be taken) all actions necessary to preserve the perfection and
priority of Bank’s security interest in such Collateral.

 

2.18        Judgments/Actions.  There are no judgments, actions, suits, claims,
proceedings or investigations existing, outstanding, pending, or to the best of
Borrower’s knowledge after due inquiry, threatened or in prospect, before any
court, agency or tribunal, or governmental authority against or involving
Borrower or any guarantor which do or could materially affect the business,
properties, prospects, financial condition, earnings, results of operations or
earnings capacity of Borrower or any guarantor or which question the validity of
the Revolving Line or any of the Loan Documents, or any action or instrument
contemplated by any of them.

 

2.19        Margin Stock.  Borrower is not engaged in the business of extending
credit for the purpose of purchasing or carrying “margin” stock within the
meaning of Regulation U of the Board of Governors of the Federal Reserve System
(12 C.F.R. Part 221), as amended from time to time (“Regulation U”).  No part of
the proceeds of any advance under the Revolving Line shall be used directly or
indirectly for the purpose of purchasing, acquiring, carrying, financing or
refinancing the purchase of any “margin stock” as defined in and contemplated by
Regulation U or for any other purpose which would constitute “purpose credit”
under Regulation U.  Borrower is not an “investment company” or a company
“controlled” by an “investment company” within the meaning of the Investment
Company Act of 1940, as amended.

 

8

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2.20        No Untrue Statements or Omissions.  Neither this Agreement, nor any
document, certificate, or statement furnished (or to be furnished) to Bank by or
on behalf of Borrower pursuant to or in connection with this Agreement contains
(or will contain) any untrue statement of a material fact or omits (or will
omit) to state a material fact necessary to make the statements contained herein
and therein not misleading.  There is no fact known to Borrower that materially
and adversely affects, or will materially and adversely affect, the assets,
business, operations, or condition of Borrower that has not been specifically
set forth in this Agreement or otherwise disclosed by Borrower to Bank in
writing.

 

2.21        Bankruptcy.  Borrower is and at all times shall remain solvent as
defined under applicable Texas state law and the federal bankruptcy code and is
not now and has not been in the past three (3) years a debtor under any title of
the United States Bankruptcy Code, 11 U.S.C. §§ 101, et seq.

 

2.22        Organizational Identification Number, Etc.  The number assigned by
the State of Delaware as Borrower’s organizational identification number is
2309680 (however, if the State of Delaware does not assign organizational
identification numbers, Borrower has indicated that by inserting the words “none
assigned” in the blank); and Borrower understands that the organizational
identification number above is not Borrower’s federal or state tax or employer
identification number.  The Revolving Line is being obtained and the Collateral
is being used, held or acquired for business purposes.

 

Nothing in this Section 2 shall be deemed to extend the availability of the
Revolving Line beyond the time noted in Section 13 hereof.

 

SECTION 3.         Inspection of Records; Further Assurance.

 

Borrower shall at reasonable times and from time to time allow Bank, by or
through any of its officers, managers, agents, employees, attorneys or
accountants to (i) examine, inspect and make extracts from Borrower’s books and
records; (ii) analyze Borrower’s financial statements; (iii) arrange for
verification of Borrower’s Accounts Receivable, Inventory, Eligible Accounts
Receivable under reasonable procedures, directly with Account Debtors or by
other methods; (iv) inspect, review and audit Borrower’s Inventory and other
Collateral at any time during normal business hours, without prior notice to
Borrower; and (v) to conduct field audits; provided, however, that (a) Bank
intends to conduct field audits at least on a semi-annual basis and (b) the cost
of all field audits shall be paid by Borrower.  Borrower shall allow, do, make,
execute and deliver all such additional and further acts, things, deeds,
assurances, agreements and instruments which Bank may require more completely to
vest in and assure to Bank its rights hereunder and in any Collateral and to
assure that Borrower’s Loan Account balance does not exceed Borrower’s
availability hereunder.

 

Nothing in this Section 3 shall be deemed to extend the availability of the
Revolving Line beyond the time noted in Section 13 hereof.

 

SECTION 4.         Security Interest of Bank in Collateral.

 

4.1          Collateral.  As security for the payment and performance of all
Liabilities, Bank shall have and Borrower hereby assigns to Bank and grants to
Bank a continuing lien on the Real Property and a continuing lien on, security
interest in and right of set-off against the following described property and
rights:

 

9

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All of Borrower’s:

 

(a)           Accounts and Accounts Receivable;

 

(b)           Inventory, equipment, machinery, furnishings and furniture,
wheresoever the same may be located;

 

(c)           contract rights, investment property, chattel paper, electronic
chattel paper and software, commercial tort claims, deposit accounts, letter of
credit rights, health-care-insurance receivables, documents, documents of title,
warehouse receipts, bills of lading, notes, notes receivable, instruments,
general intangibles and payment intangibles;

 

(d)           licenses, patents, tradenames, trademarks and copyrights and any
and all licenses and other rights to use, incorporate, license, sell and/or
assign any licenses, patents, tradenames, trademarks and copyrights and any
property incorporating any of the foregoing, together with all applications for
registration and registrations obtained for any of the foregoing, and all
renewals and/or extensions thereof, rights to sue for infringements and all
other rights corresponding thereto, and all related licenses and royalties, and
all further or other property that pertains, incorporates or relates to or
emanates or derives from any license, patent, tradename, trademark or copyright
and/or the ownership, use, possession, transfer, or licensing thereof (whether
as licensor or licensee) and any property which embodies or incorporates any of
the foregoing, and all proceeds, products, rents, issues, royalties, profits and
returns of and from any of the foregoing, and all related rights and property
(collectively referred to as “Intellectual Property”);

 

(e)           goods, instruments, notes, notes receivable, documents, documents
of title, warehouse receipts, bills of lading, certificates of title, policies
and certificates of insurance, securities, investment property, chattel paper,
deposits, cash and other property which are now or may hereafter be in the
possession of or deposited with Bank, or which are otherwise assigned to Bank,
or as to which Bank may now or hereafter control possession by documents of
title or otherwise; and

 

(f)            substitutions, accessions, additions, parts, accessories,
attachments, replacements, Proceeds and products of, for and to any and all of
the foregoing, including, without limitation, any and all insurance and tort
proceeds, and any and all such substitutions, accessions, additions, parts,
accessories, attachments, replacements, Proceeds and products in the form of any
of the property described or referenced in (a) through (e) above,

 

whether now or hereafter owned, existing, created, arising or acquired.

 

4.2          Security Interest in Collateral Created/Acquired Hereafter.  No
submission by Borrower to Bank of any schedule or other particular
identification of Collateral shall be necessary to vest in Bank a security
interest in each and every item of Collateral now existing or hereafter created
or acquired, but rather, such security interest shall vest in Bank immediately
upon the creation or acquisition of any item of Collateral, without the
necessity for any other or further action by Borrower or Bank; provided,
however, that Borrower shall execute such other and

 

10

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additional documents, instruments and agreements as requested by Bank to
evidence the security interests contemplated hereby.  In addition to and without
limiting any other rights and remedies of Bank arising under this Agreement
and/or applicable law, Borrower hereby grants, assigns and transfers to Bank a
fully-paid, royalty-free, perpetual, non-exclusive, unrestricted license to use,
sell, assign, modify, reproduce, distribute, license and sublicense any
copyright, patent, tradename, trademark or license and other Intellectual
Property constituting Collateral and any goods and other property incorporating
any of the foregoing which Bank may exercise at any time upon or after the
occurrence of a default or event of default under this Agreement or any of the
other Loan Documents without further action, consent or approval of Borrower.

 

4.3          Further Assurances.  To the extent allowable under applicable law,
the Uniform Commercial Code of Texas shall govern the security interests
provided for herein.  In connection therewith, Borrower (at Borrower’s expense)
shall take such steps and execute, deliver and file (as applicable) (or cause
the execution, delivery and filing (as applicable) of) such financing
statements, continuation statements, agreements (including, without limitation,
security agreements and landlord, creditor and mortgagee subordination
agreements), documents, and papers (all in form and substance acceptable to
Bank) as Bank may from time to time request to perfect or preserve the
perfection and priority of Bank’s security interests granted hereby or by any of
the other Loan Documents.  Borrower hereby appoints and empowers Bank, or any
employee of Bank which Bank may designate for the purpose, as its
attorney-in-fact, to execute and/or endorse (and file, as appropriate) on its
behalf any documents, agreements, papers, checks, financing statements and other
documents which, in Bank’s sole judgment, are necessary to be executed, endorsed
and/or filed in order to (i) perfect or preserve the perfection and priority of
Bank’s security interests granted hereby or by any of the other Loan Documents
and (ii) collect or realize upon the Collateral or otherwise exercise its rights
and remedies under any of the Loan Documents or applicable law.  Without
limiting any of Bank’s rights and remedies under law or any other provisions of
this Agreement or any of the other Loan Documents, Borrower authorizes the
filing by Bank of any and all financing statements in any and all jurisdictions
Bank deems necessary or appropriate to perfect Bank’s security interest in the
Collateral and/or any other property.

 

4.4          Additional Further Assurances.  If, by reason of location of
Borrower, the Collateral or otherwise, the creation, validity, or perfection of
security interests provided for herein are governed by law other than the
Uniform Commercial Code of Texas, Borrower shall take such steps and execute and
deliver such documents, agreements, papers and financing statements as Bank may
from time to time request to comply with the Uniform Commercial Code or other
laws of the State of Texas or other states or jurisdictions.  Borrower hereby
appoints and empowers Bank, or any employee of Bank which Bank may designate for
the purpose, as its attorney-in-fact, to execute and/or endorse (and file, as
appropriate) on its behalf any documents, agreements, papers, checks, financing
statements and other documents which, in Bank’s sole judgment, are necessary to
be executed, endorsed and/or filed in order to (i) perfect or preserve the
perfection and priority of Bank’s security interests granted hereby or by any of
the other Loan Documents and (ii) collect or realize upon the Collateral or
otherwise exercise its rights and remedies under any of the Loan Documents or
applicable law.

 

4.5          Restrictions on Pledging, Mortgaging Collateral.  Except for the
Permitted Liens, Borrower shall not pledge, mortgage, or create or suffer to
exist a security interest in any of the Collateral or any Proceeds or products
thereof, or sell, assign, or create a security interest in any of the Collateral
or any Proceeds or products thereof in favor of any person other than Bank
unless such security interest is expressly subordinated to Bank’s security
interest therein and Bank has approved in writing the existence and status of
such security interest.  Nothing in this Section 4

 

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shall be deemed to extend the availability of the Revolving Line beyond the time
noted in Section 13 hereof.

 

SECTION 5.         Collection of Accounts Receivable.

 

5.1          Collection and Application of Proceeds; Notifying Account Debtors. 
Until Bank requests that Account Debtors on Accounts Receivable of Borrower be
notified of Bank’s security interest therein, Borrower shall continue to collect
such Accounts Receivable.  Upon Bank’s request, Borrower shall notify Bank of
any collections received and shall hold the same in trust for Bank without
commingling the same with other funds of Borrower and, if Bank shall request,
shall turn the same over to Bank immediately upon receipt in the identical form
received.  All Account payments and other Proceeds transmitted to Bank via any
lock-box, by Borrower or otherwise, may be handled and administered in and
through a remittance or special account; the maintenance of any such account
shall be solely for the convenience of Bank, and Borrower shall not have any
right, title, or interest in or to any such account or in the amounts at any
time appearing to the credit thereof.  Bank may apply and credit Account
payments and other Proceeds transmitted to or otherwise received by Bank via any
lock-box, by Borrower or otherwise, against the outstanding balance in
Borrower’s Loan Account or any other Liabilities; however, Bank shall not be
required to credit Borrower’s Loan Account or any other Liabilities with the
amount of any check or other instrument constituting provisional payment until
Bank has received final payment thereof at its office in cash or solvent credits
accepted by Bank.  In addition, Borrower shall, at the request of Bank, notify
the Account Debtors of the security interest of Bank in any Account and shall
instruct Account Debtors to remit payments directly to Bank, and Bank may itself
at any time so notify and instruct Account Debtors.

 

5.2          Collection of Accounts.  Borrower (i) shall (a) deliver any
instrument or chattel paper evidencing or constituting an Account to Bank, and
b) use its best efforts to collect its Accounts in a commercially reasonable
manner; and (ii) agrees that no court action or other legal proceeding or
garnishment, attachment, repossession of property, detinue, sequestration or any
other attempt to repossess any merchandise covered by an Account shall be
attempted by Borrower except by or under the direction of competent legal
counsel.  Borrower hereby agrees to indemnify and hold Bank harmless for any
loss or liability of any kind or character which may be asserted against Bank by
virtue of any suit filed, process issued, or any repossession or attempted
repossession done or attempted by Borrower or by virtue of any other actions or
endeavors which Borrower may make to collect any Accounts or repossess any such
merchandise.

 

Nothing in this Section 5 shall be deemed to extend the availability of the
Revolving Line beyond the time noted in Section 13 hereof.

 

SECTION 6.         Additional Affirmative Covenants.

 

Until all indebtedness of Borrower to Bank has been paid in full and all
Liabilities have been satisfied:

 

6.1          [Intentionally deleted].

 

6.2          Insurance.  Borrower shall (i) maintain insurance (written by
insurance companies acceptable to Bank) in form, amount and substance acceptable
to Bank, including, without limitation, extended multi-peril hazard, worker’s
compensation, general liability insurance and insurance upon Borrower’s
property, all facets of its businesses and all the Collateral; (i) furnish to
Bank, upon request, a statement of the insurance coverage; (i) use its best
efforts to protect and

 

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preserve the Collateral and shall obtain other or additional insurance promptly,
upon request of Bank, to the extent that such insurance may be available; and
(iv) cause Bank to be named as an additional insured and a Bank loss payee as to
all insurance covering Collateral, pursuant to endorsements in form and
substance acceptable to Bank.  All insurance proceeds, payments and other
amounts paid to or received by Bank under or in connection with any and all such
policies may be retained by Bank in whole or part as additional Collateral for
the Liabilities and/or, at Bank’s option, be applied in whole or part to the
payment of such of the Liabilities as shall then be due and/or, at Bank’s
option, be held (in a remittance or other special account in which neither
Borrower nor any guarantor shall have an interest) for application to
Liabilities not yet due and be applied to such Liabilities as and when the same
shall come due, in such order as Bank may determine in its sole discretion.  All
insurance policies shall provide for a minimum of ten (10) days’ written
cancellation notice to Bank and, at Bank’s request, all such policies shall be
delivered to and held by Bank.  In the event of failure to provide and maintain
insurance required by this Agreement, Bank may, at its option, provide such
insurance and charge the costs and expenses incurred to Borrower’s Loan
Account.  Bank is hereby made attorney-in-fact for Borrower to (i) obtain,
adjust, and settle, in its sole discretion, such insurance, and (i) endorse any
drafts or checks issued in connection with such insurance.

 

6.3          Compliance with Laws.  Borrower does and shall at all times while
any Liabilities remain unsatisfied comply with all applicable laws, ordinances,
rules and regulations of any governmental authority or entity governing or
affecting Borrower, any of its property, the Collateral or any part thereof, and
shall immediately notify Bank of any and all actual, alleged or asserted
violations of any such laws, ordinances, rules or regulations.  Without
limitation to the generality of the foregoing, Borrower shall comply, and cause
to be complied, with all laws, governmental standards and regulations applicable
to Borrower or any Collateral in respect of occupational health and safety,
toxic and hazardous waste and substances and environmental matters.  Borrower
promptly shall notify Bank of receipt of any notice of any actual, alleged or
asserted violation of any such law, standard or regulation.  Borrower hereby
agrees to indemnify, defend and hold Bank harmless from all loss, cost, damage,
claim and expense incurred by Bank on account of Borrower’s breach of any
representation, warranty or requirement of this Section, Borrower’s failure to
perform the obligations of this Section, and/or Borrower’s or any Collateral’s
violating any applicable laws, ordinances, rules or regulations, including,
without limitation, any environmental or occupational health and safety laws or
regulations.  This indemnification shall survive the closing of the Revolving
Line, the payment of the Revolving Line and the exercise of any right or remedy
under any of the Loan Documents.  Borrower represents that there are no pending
claims or threats of claims by private or governmental or administrative
authorities relating to environmental impairment, conditions, or regulatory
requirements involving Borrower or any Collateral.

 

6.4          Debt Service Coverage.  Borrower shall maintain a minimum Debt
Service Coverage Ratio (defined as the sum of (a) net income after taxes plus
(i) interest expense, depreciation and amortization less dividends and
distributions divided by (b) the sum of (i) interest expense and Current
Maturities of Long Term Debt) of 1.25 to 1.0.  The Debt Service Coverage Ratio
shall be calculated and tested as of the last day of each fiscal quarter of
Borrower, commencing with the fiscal quarter ending December 31, 2004 on a
cumulative basis for the four quarters ended as of such date.

 

6.5          Tangible Net Worth.  Borrower shall maintain a minimum Tangible Net
Worth of not less than $12,000,000.00.  Tangible Net Worth shall be calculated
and tested quarterly as of the last day of each fiscal quarter of Borrower.

 

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6.6          Total Debt to Tangible Net Worth.  Borrower’s Total Debt to
Tangible Net Worth ratio will not exceed 1.50 to 1.00.  Borrower’s Total Debt to
Tangible Net Worth ratio shall be calculated and tested quarterly as of the last
day of each fiscal quarter of Borrower.

 

6.7          Fees.  In consideration of (a) the Bank’s commitment to make
advances on the Revolving Line and the Bank’s incurring certain administrative
expenses, Borrower agrees to and shall pay to Bank on or before the date hereof
and thereafter upon any renewal or extension of the Revolving Line Maturity Date
in good and immediately available funds, (i) a nonrefundable $500.00
administrative fee and (ii) quarterly (or more often as may be required by the
terms below), in arrears, a non-usage fee (calculated as set forth below on the
basis of a 360-day year) beginning to accrue on the date hereof with the first
payment due on July 1, 2007, and payments thereafter due on the first day of
each succeeding calendar quarter (and on the Revolving Line Maturity Date (or on
any other date when advances under the Revolving Line are terminated and the
amount outstanding under the Revolving Line is paid in full)) equal to the sum
of the daily calendar quarter or portion thereof preceding such payment: 
one-fourth of one percent (.25%) of the “Unused Availability” shall mean and
refer to the amount by which $6,000,000.00 exceeds the balance of the Revolving
Loan Account on the date such calculation is made and (b) the Banks commitment
to the Term Loan and the Bank’s incurring certain administrative expenses,
Borrower agrees to and shall bay to Bank on or before the date hereof in good
and immediately available funds a non-refundable administrative fee of $500.00. 
Borrower further agrees to pay any fee imposed by Bank pursuant to the Loan
Documents including, but not limited to the fees set forth in Section 11 or
Section 12 herein.

 

6.8          Notification of Defaults, Suits, Etc.  Promptly after the same
shall have become known to Borrower, Borrower shall notify Bank in writing of
(i) any default or event of default under any of the Loan Documents, (ii) any
material change in Borrower’s financial condition and/or prospects and/or
(iii) any action, suit or proceeding at law or in equity or by or before any
governmental instrumentality or other agency which, if adversely determined,
might impair the ability of Borrower to perform its obligations under the Loan
Documents, impair the ability of Borrower to carry on its business substantially
as now conducted, or which might materially affect the business, operations,
properties, assets or condition, financial or otherwise, of Borrower.

 

6.9          Deposit Account.  So long as any Liabilities are outstanding,
Borrower shall establish and maintain its primary deposit accounts with Bank.

 

Nothing in this Section 6 shall be deemed to extend the availability of the
Revolving Line beyond the time noted in Section 13 hereof.

 

SECTION 7.         Additional Negative Covenants.

 

Until all indebtedness of Borrower to Bank has been paid in full and all
Liabilities have been satisfied:

 

7.1          Liens.  Borrower shall not create or permit the creation of any
lien upon any of the Collateral except for Permitted Liens and the security
interests granted to Bank under the Loan Documents.

 

7.2          [Intentionally deleted].

 

7.3          Dividends; Bonuses.  Borrower shall not pay, make or declare any
dividends, distributions, bonuses or other similar payments to Borrower’s
directors, managers, officers,

 

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employees, owners, parent, members, affiliates, subsidiaries or other related
persons or entities that cause or would cause a violation or further violation
of any of the covenants, terms or conditions of Section 6 or Section 7 of this
Agreement.  Borrower shall not redeem, purchase or in any manner acquire any of
its outstanding shares without Bank’s prior written consent.

 

7.4          Acquiring Assets, Etc. of Other Entities.  Borrower shall not
purchase or acquire, directly or indirectly, any shares of stock, any
substantial part of the assets of, any interest in, evidences of indebtedness,
loans or other securities of any person, corporation or other entity.

 

7.5          Dissolution, Mergers, Change in Nature.  Borrower shall not
(i) liquidate, discontinue or materially reduce its normal operations with
intention to liquidate; (i) cause, allow or suffer to occur (a) the merger or
consolidation of or involving Borrower with or into any corporation,
partnership, or other entity, or (b) the sale, lease, transfer or other disposal
of all or any substantial part of its assets, or any of its Accounts Receivable;
(i) acquire any corporation, partnership or other entity (or any interest
therein), whether by stock or asset purchase or acquisition or otherwise,
without the prior written consent of Bank; (iv) enter into any lease which could
be characterized as a capitalized lease; or (v) cause, allow, or suffer to occur
any change in the ownership, nature, control or structure of Borrower without
the prior written consent of Bank.

 

7.6          Subordinated Debt.  Borrower shall not make any payment upon any
Subordinated Debt described in any subordination agreement delivered to Bank
unless no Event of Default exists or would be caused by or result from such
payment.

 

7.7          Loans to Related Parties and Affiliates.  Borrower shall not make,
extend or allow to remain outstanding any loans or advances to or investments in
Borrower’s affiliates, parent, subsidiaries, owners, directors, employees,
members, officers, managers or other related persons or entities without the
prior written consent of Bank.

 

Nothing in this Section 7 shall be deemed to extend the availability of the
Revolving Line beyond the time noted in Section 13 hereof.

 

SECTION 8.         Events of Default; Acceleration.  Any or all of the
obligations, indebtedness and liabilities of Borrower to Bank, including,
without limitation, the Liabilities, shall be, at the option of Bank and
notwithstanding any time or credit allowed by any of the Loan Documents or any
other document, agreement or instrument evidencing any of the Liabilities,
immediately due and payable without notice or demand, and the obligation of Bank
to make advances hereunder shall immediately cease and terminate upon and after
the occurrence of any of the following events of default (each an “event of
default” or an “Event of Default”):

 

(a)           default in the payment or performance, when due or payable, of any
of the Liabilities of Borrower or any liability or obligation (whether now or
hereafter existing, arising or incurred, direct or indirect, conditional or
unconditional) of any endorser, guarantor, or surety for any of the Liabilities
of Borrower to Bank;

 

(b)           failure by Borrower, any guarantor or any other person or entity,
as applicable, to (i) pay or perform any act or obligation imposed hereby or by
any of the other Loan Documents, or (i) comply with any of the terms,
conditions, warranties, covenants or requirements contained or referenced herein
or in one or more of the other Loan Documents;

 

15

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(c)           failure of Borrower or any other person or entity, as applicable,
to pay when due (i) any tax or (i) any premium on any (a) insurance policy
assigned to Bank, or (b) any insurance covering any Collateral;

 

(d)           if any warranty or representation contained herein shall prove
false or misleading or if Borrower or any endorser, guarantor or surety for any
of the Liabilities of Borrower to Bank made or makes any other misrepresentation
to Bank for the purpose of obtaining credit or any extension of credit;

 

(e)           failure of Borrower or any endorser, guarantor, or surety for any
of the Liabilities of Borrower to Bank to furnish financial information or to
permit the inspection of the books or records or Collateral of Borrower or of
any endorser, guarantor or surety for any of the Liabilities of Borrower to
Bank;

 

(f)            issuance of an injunction or attachment against property of, the
general assignment by, judgment against or filing of a petition in bankruptcy by
or against Borrower or any endorser, guarantor or surety for any of the
Liabilities of Borrower to Bank; the filing of an application in any court for a
receiver for Borrower or any endorser, guarantor or surety for any of the
Liabilities of Borrower to Bank; or the death, dissolution, incapacity or
liquidation of Borrower or of any endorser, guarantor or surety for any of the
Liabilities of Borrower to Bank;

 

(g)           calling of a meeting of creditors, appointment of a committee of
creditors or liquidation agents, or offering of a composition or extension to
creditors by, for or of Borrower or by, for or of any endorser, guarantor or
surety for any of the Liabilities of Borrower to Bank;

 

(h)           bankruptcy or Insolvency of Borrower or of any of Borrower’s
owners, or of any endorser, guarantor or surety for any of the Liabilities of
Borrower to Bank;

 

(i)            any change in the ownership, nature, control or structure of
Borrower without the prior written consent of Bank;

 

(j)            failure of Borrower or any other person or entity, as applicable,
to maintain any insurance required hereunder and/or assigned or pledged to Bank
in connection herewith;

 

(k)           occurrence or continuation of any default or event of default by
or attributable to Borrower under or in connection with any mortgage, lease,
security agreement, note, bond, indenture, loan agreement or similar instrument
or agreement to which Borrower is now or may hereafter be a party or by which
Borrower or any of its property (including, without limitation, the Collateral)
is now or may hereafter be bound or affected;

 

(l)            fraud or misrepresentation by or on behalf of Borrower or any
guarantor in its transactions with Bank;

 

(m)          such a change in the condition or affairs (financial or otherwise)
of Borrower or of any endorser, guarantor or surety for any of the Liabilities
of

 

16

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Borrower to Bank or of the Collateral or any other source of repayment of or
security for any of the Liabilities which, in the opinion of Bank, impairs
Bank’s security or increases its risk;

 

(n)           any breach or violation of or failure to abide by any warranty,
covenant, term or provision of this Agreement, the Note or any of the other Loan
Documents; Bank’s not obtaining or maintaining a first perfected security
interest in any of the Collateral; or the termination, cancellation or
revocation of any of the Loan Documents without Bank’s consent or the
determination by Bank that any of the Loan Documents is void, voidable or
unenforceable;

 

(o)           a judgment against Borrower remaining unpaid, unstayed or
undismissed for a period of more than five (5) days; or

 

(p)           Borrower discontinuing doing business for more than five
(5) consecutive calendar days during any year for any reason.

 

It is expressly understood and agreed that neither (a) the provisions above or
any of the other terms of any of the Loan Documents nor (b) Borrower’s or any
other person’s compliance or non-compliance with this Agreement or any of the
other Loan Documents shall abrogate or restrict Bank’s right to demand payment
in full of the Revolving Line and all other Liabilities at any time in Bank’s
sole discretion.

 

SECTION 9.         Power to Sell or Collect Collateral.

 

Upon the occurrence of any of the above events of default and at any time
thereafter, Bank shall have, in addition to all other rights and remedies, the
remedies of a secured party under the Uniform Commercial Code of Texas
(regardless of whether the Uniform Commercial Code has been enacted in the
jurisdiction where rights or remedies are asserted), including, without
limitation, the right to take possession and dispose of the Collateral, and for
that purpose Bank may, so far as Borrower can give authority therefor, enter
upon any premises on which the Collateral may be situated and remove the same
therefrom or take possession of same and/or store the same on such premises for
a reasonable time pending disposition under the terms of this Agreement or
applicable law.  Bank may require Borrower to assemble the Collateral and make
it available to Bank at a place designated by Bank which is reasonably
convenient to both parties.  Unless the Collateral is perishable or is of a type
customarily sold on a recognized market, Bank shall give to Borrower at least
five (5) days’ prior written notice of the time and place of any public sale of
Collateral or of the time after which any private sale or any other intended
disposition is to be made.  Bank may, at any time, in its discretion, transfer
any securities or other property constituting Collateral into its own name or
that of its nominee and receive the income therefrom and hold the same as
security for the Liabilities or apply it on principal, interest, charges or
expenses due on Liabilities in any manner deemed appropriate by Bank.  Bank may
demand, collect, receipt for, settle, compromise, adjust, sue for, foreclose or
realize upon Collateral as Bank may determine, whether or not Liabilities or
Collateral are then due, and Bank may receive, open and dispose of mail
addressed to Borrower and sign and endorse notes, checks, drafts, money orders,
certificates and documents of title and related forms or other evidences of
payment, shipment or storage or any form of Collateral on behalf of and in the
name of Borrower as Borrower’s attorney-in-fact for such purpose.  Bank may
apply Collateral and the Proceeds from any Collateral against the Liabilities
secured hereby in any manner deemed appropriate by Bank.  The enumeration of the
foregoing rights is not intended to be exhaustive, and the exercise of any right
shall not preclude the exercise of any other rights, all of which shall be
cumulative.  As

 

17

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against the obligations secured hereby, Borrower hereby expressly waives all
claims and all rights to claim any exemptions, both as to personal and real
property, allowed or allowable under the Constitution or laws of the United
States, the State of Texas or any other jurisdiction.  Any notice to Borrower of
sale, disposition or other intended action by Bank, required by law to be given
to Borrower, sent to Borrower at the address of Borrower shown on the first
page of this Agreement or at such other address of Borrower as may from time to
time be shown on Bank’s records, at least five (5) days prior to such action,
shall constitute reasonable notice to Borrower.  Bank may resort to any security
given by this Agreement or to any other security now existing or hereafter given
to secure the payment of Borrower’s Liabilities, in whole or in part, and in
such portions and in such order as may seem best to Bank in its sole discretion,
and any such action shall not in any way be considered as a waiver of any of the
rights, benefits, or security interests evidenced by this Agreement or any of
the other Loan Documents.  Bank may, at all times, proceed directly against
Borrower to enforce payment of Borrower’s Liabilities and shall not be required
first to enforce its rights in the Collateral or any other security granted to
it.  Bank shall not be required to take any action of any kind to preserve,
collect, or protect Bank’s or Borrower’s rights in the Collateral or any other
security granted to Bank.

 

SECTION 10.       Set Off.

 

Bank and any participant and any holder of all or any part of the Liabilities
are given hereby as additional security for all Liabilities a continuing lien
and security interest in and upon any and all moneys, securities and other
property of Borrower and the Proceeds thereof, now or hereafter held or received
by or in transit to Bank (or such participant or holder) from or for Borrower,
whether for safekeeping, custody, pledge, transmission, collection or otherwise,
and also upon any and all deposit balances (general or special) and credits of
Borrower with, and any and all claims of Borrower against Bank (or such
participant or holder) at any time existing, and upon the occurrence of an event
of default hereunder, Bank (or such participant or holder) may apply or set off
the same against the Liabilities secured hereby or by any of the other Loan
Documents in any manner deemed appropriate by Bank (or such participant or
holder).  Borrower agrees that any other person or entity purchasing a
participation from Bank may exercise all its rights of payment (including the
right of set-off) with respect to such participation as fully as if such person
or entity were the direct creditor of Borrower in the amount of such
participation.

 

SECTION 11.       Waivers.

 

Borrower waives demand, presentment, protest, notice of protest, notice of
intent to accelerate, notice of acceleration, notice of acceptance of this
Agreement, and notice of advances and loans made, credit extended, Collateral
received or delivered or other action taken in reliance hereon and all other
demands and notices of any description.  With respect both to the Liabilities
and Collateral, Borrower assents to any extension or postponement of the time of
payment or any other indulgence, to any substitution, exchange or release of any
or all of the Collateral, to the addition or release of any party or person
primarily or secondarily liable, to the acceptance of partial payments thereon
and the settlement, compromising or adjusting of any thereof, all in such manner
and at such time or times as Bank may deem advisable.  Bank shall have no duty
as to the collection or protection of any or all of the Collateral or any income
therefrom, nor as to the preservation of any rights against prior parties, nor
as to the preservation of any rights pertaining thereto beyond the safe custody
of Collateral in its possession.  Bank may exercise its rights with respect to
Collateral without resorting or regard to other Collateral or sources of
reimbursement for the Liabilities.  Bank shall not be deemed to have waived any
of its rights upon or under any of the Liabilities or Collateral unless such
waiver be in writing and signed by Bank.  No course of dealing and no delay or
omission on the part of Bank in exercising any right shall operate as a waiver
of

 

18

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such right or any other right.  A waiver on any one occasion shall not be
construed as a bar to or waiver of any right on any future occasion.  All rights
and remedies of Bank with respect to Liabilities or Collateral, whether
evidenced hereby, by any of the other Loan Documents or by any other instrument
or paper, shall be cumulative and may be exercised singularly or concurrently. 
Bank reserves the right to assess and collect a fee in connection with any
agreement by Bank to waive the violation of any covenant contained in the Loan
Documents or to waive or forego its rights and remedies upon the occurrence of
an event of default.  This section shall not in any respect obligate Bank to
waive the violation of any covenant or to forego its rights and remedies upon
the occurrence of an event of default, which Bank may or may not do in its sole
discretion.

 

SECTION 12.       Expenses; Proceeds of Collateral.

 

Irrespective of whether the proceeds of the Revolving Line are disbursed,
Borrower shall pay all fees and expenses, including, without limitation, legal
fees and expenses, filing fees, insurance premiums and expenses, appraisal fees,
recording costs and taxes (except taxes measured by Bank’s income) incurred by
Bank or Borrower from time to time in connection with the preparation and
closing, filing, administration, amendment and modification of the Revolving
Line, this Agreement, the Notes, and the other Loan Documents and those
documents and instruments associated with the perfection and creation of the
security interests and other rights granted pursuant hereto or pursuant to any
of the other Loan Documents and Bank’s selling, negotiating, documenting and/or
enforcing participations in the Revolving Line and the Loan Documents.  Borrower
shall pay to Bank on demand any and all such fees and expenses incurred or paid
by Bank, together with any and all fees, expenses and costs (a) of collection or
(b) otherwise incurred or paid by Bank in protecting, enforcing or realizing its
rights upon or with respect to any of the Liabilities, the Loan Documents or the
Collateral (including, without limitation, reasonable counsel fees, including,
without limitation, those incurred in connection with any appeal or any
bankruptcy proceedings).  After deducting all of said fees and expenses, the
residue of any proceeds of collection or sale of Liabilities or Collateral shall
be applied to the Liabilities and interest, charges and expenses constituting or
related to the Liabilities in such order of preference as Bank may determine,
proper allowance for Liabilities not then due being made, and, to the extent
allowed by law, without limiting any of Borrower’s or any guarantor’s
obligations or any of Bank’s rights under the Loan Documents, Borrower and
guarantors shall remain liable for any deficiency.

 

SECTION 13.       Duration; Extension.

 

The Revolving Line shall terminate on the Revolving Line Maturity Date, at which
time all principal, interest, charges and expenses outstanding hereunder, under
the Revolving Note or under any of the other Loan Documents shall be due and
payable in full unless due sooner under the terms of the Revolving Note, this
Agreement or any of the other Loan Documents.  It is understood that any
extension hereof may require a revision of certain provisions of this
Agreement.  No modification or amendment of this Agreement or extension of the
Revolving Line Maturity Date shall be effective unless placed in writing and
duly executed by Bank and Borrower.  It is expressly agreed that this Agreement
shall survive the maturity or termination of the Revolving Line in all respects
necessary for Bank to exercise its rights and remedies hereunder and with
respect to the Collateral.  The maturity or termination of the Revolving Line
shall in no way affect any transactions entered into or rights created or
obligations incurred prior to such maturity or termination; rather, such rights
and obligations shall be fully operative until the same are fully disposed of,
concluded and/or liquidated.  Without limitation to the generality of the
foregoing, such maturity or termination shall not release nor diminish any of
(i) Borrower’s obligations and agreements, or (ii) Bank’s rights and remedies
arising hereunder or in connection herewith until

 

19

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full and final payment and performance of all of the Liabilities.  This
Agreement shall be a continuing agreement in every respect.

 

SECTION 14.       General.

 

Any demand upon or notice to Borrower that Bank may elect to give shall be
effective (i) upon delivery if such notice is given personally, or (ii) upon the
third day following the date of dispatch if deposited in the mails, addressed to
Borrower at the address noted on the first page of this Agreement or, if
Borrower has notified Bank in writing of a change of address, to Borrower’s last
address so notified, or (iii) upon receipt if by facsimile or telecopy.  Demands
or notices addressed to Borrower’s address at which Bank customarily
communicates with Borrower shall also be effective.  If at any time or times by
assignment or otherwise Bank transfers any of the Liabilities (either separately
or together with the Collateral therefor), such transfer shall carry with it
Bank’s powers and rights under this Agreement and the other Loan Documents with
respect to the Liabilities and/or Collateral transferred, and the transferee
shall become vested with said powers and rights whether or not they are
specifically referred to in the transfer.  If and to the extent Bank retains any
of the Liabilities or Collateral, Bank will continue to have the rights and
powers herein set forth with respect thereto.  All notices provided to Bank by
Borrower under or related to any of the Loan Documents, the Liabilities or the
Collateral, including, without limitation, under any one or more of sections of
Article 9 of the Texas Uniform Commercial Code, shall be sent to the address of
Bank noted on the first page of this Agreement, Attention:  Structured Lending,
with a copy to Compass Bank, P.O. Box 11830, Birmingham, Alabama 35202; no
notice sent to Bank shall be effective until received by Bank.  THE NOTE, THIS
AGREEMENT AND ALL OF THE OTHER LOAN DOCUMENTS, AND ALL RIGHTS AND OBLIGATIONS
HEREUNDER AND THEREUNDER, INCLUDING MATTERS OF CONSTRUCTION, VALIDITY AND
PERFORMANCE, SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL
LAWS OF THE STATE OF TEXAS, EXCEPT THAT ANY CONFLICT OF LAWS RULE OF SUCH
JURISDICTION THAT WOULD REQUIRE REFERENCE TO THE LAWS OF SOME OTHER JURISDICTION
SHALL BE DISREGARDED.  ANY SUITS, CLAIMS OR CAUSES OF ACTION ARISING DIRECTLY OR
INDIRECTLY FROM THIS AGREEMENT, THE NOTE, THE OTHER LOAN DOCUMENTS OR ANY OTHER
AGREEMENTS OR INSTRUMENTS BETWEEN BANK AND BORROWER RELATING TO SUCH DOCUMENTS
MAY BE BROUGHT IN A COURT OF APPROPRIATE JURISDICTION IN HARRIS COUNTY, TEXAS
AND OBJECTIONS TO VENUE AND PERSONAL JURISDICTION IN SUCH FORUM ARE HEREBY
EXPRESSLY WAIVED.  THIS AGREEMENT HAS BEEN NEGOTIATED AND IS BEING EXECUTED AND
DELIVERED IN THE STATE OF TEXAS, OR IF EXECUTED BY BORROWER ELSEWHERE, SHALL
BECOME EFFECTIVE UPON BANK’S RECEIPT AND ACCEPTANCE OF THE EXECUTED ORIGINAL OF
THIS AGREEMENT IN THE STATE OF TEXAS; PROVIDED, HOWEVER, THAT BANK SHALL HAVE NO
OBLIGATION TO GIVE, NOR SHALL BORROWER BE ENTITLED TO RECEIVE ANY NOTICE OF SUCH
RECEIPT AND ACCEPTANCE FOR THIS AGREEMENT TO BECOME A BINDING OBLIGATION OF
BORROWER.  IT IS INTENDED, AND BORROWER AND BANK SPECIFICALLY AGREE, THAT THE
LAWS OF THE STATE OF TEXAS GOVERNING INTEREST SHALL APPLY TO THIS TRANSACTION. 
BORROWER HEREBY ACKNOWLEDGES THAT (I) THE NEGOTIATION, EXECUTION, AND DELIVERY
OF THE LOAN DOCUMENTS CONSTITUTE THE TRANSACTION OF BUSINESS WITHIN THE STATE OF
TEXAS, (II) ANY CAUSE OF ACTION ARISING UNDER ANY OF SAID LOAN DOCUMENTS WILL BE
A CAUSE OF ACTION ARISING FROM SUCH TRANSACTION OF BUSINESS, AND (III)

 

20

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BORROWER UNDERSTANDS, ANTICIPATES, AND FORESEES THAT ANY ACTION FOR ENFORCEMENT
OF PAYMENT OF THE REVOLVING LINE OR THE LOAN DOCUMENTS MAY BE BROUGHT AGAINST IT
IN THE STATE OF TEXAS.  TO THE EXTENT ALLOWED BY LAW, BORROWER HEREBY SUBMITS TO
JURISDICTION IN THE STATE OF TEXAS FOR ANY ACTION OR CAUSE OF ACTION ARISING OUT
OF OR IN CONNECTION WITH THE REVOLVING LINE OR THE LOAN DOCUMENTS AND WAIVES ANY
AND ALL RIGHTS UNDER THE LAWS OF ANY STATE OR JURISDICTION TO OBJECT TO
JURISDICTION OR VENUE WITHIN HARRIS COUNTY, TEXAS; NOTWITHSTANDING THE
FOREGOING, NOTHING CONTAINED IN THIS PARAGRAPH SHALL PREVENT BANK FROM BRINGING
ANY ACTION OR EXERCISING ANY RIGHTS AGAINST BORROWER, ANY GUARANTOR, ANY
SECURITY FOR THE REVOLVING LINE OR ANY OF BORROWER’S PROPERTIES IN ANY OTHER
COUNTY, STATE, OR JURISDICTION.  INITIATING SUCH ACTION OR PROCEEDING OR TAKING
ANY SUCH ACTION IN ANY OTHER STATE OR JURISDICTION SHALL IN NO EVENT CONSTITUTE
A WAIVER BY BANK OF ANY OF THE FOREGOING.  Nothing contained herein, or in any
of the documents contemplated hereby, shall be deemed to render Bank on the one
hand, and Borrower on the other hand, partners or venturers for any purpose. 
This Agreement is intended to take effect as a sealed instrument.

 

SECTION 15.       Miscellaneous.

 

In the event of actual conflict in the terms and provisions of this Agreement
and any of the other Loan Documents or any other document, instrument or
agreement executed in connection with this Agreement or described or referred to
in this Agreement, the terms and provisions most favorable to Bank shall
control.  No modification, consent, amendment or waiver of any provision of this
Agreement or any of the other Loan Documents, nor consent to any departure by
Borrower therefrom, shall be effective unless the same shall be in writing and
signed by Bank, and then shall be effective only in the specific instance and
for the purpose for which given.  This Agreement and each of the other Loan
Documents are binding upon Borrower, its successors and assigns, and inure to
the benefit of Bank, its successors and assigns.  Borrower may not assign or
delegate any of its rights or obligations under the Revolving Line, this
Agreement or any of the other Loan Documents.  All representations and
warranties of Borrower herein, and all covenants and agreements of Borrower
herein, in the other Loan Documents, or in any other document delivered
hereunder or in connection herewith, shall survive the execution of this
Agreement and shall be deemed continuing representations, warranties, covenants
and agreements.

 

This Agreement and each of the other Loan Documents shall be deemed to be
drafted by all parties hereto and shall not be construed against any party
hereto.  In the event any one or more of the terms or provisions contained in
this Agreement, in any of the other Loan Documents or in any other instrument or
agreement referred to herein or executed in connection with or as security for
the Liabilities, or any application thereof to any person or circumstances,
shall be declared prohibited, illegal, invalid or unenforceable to any extent in
any jurisdiction, as determined by a court of competent jurisdiction, such term
or provision, in that jurisdiction, shall be ineffective only to the extent of
such prohibition, illegality, invalidity or unenforceability, or as applied to
such persons or circumstances, without invalidating or rendering unenforceable
the remaining terms or provisions hereof or thereof or affecting the validity or
enforceability of such term or provision in any other jurisdiction or as to
other persons or circumstances in such jurisdiction, unless such would effect a
substantial deviation from the general intent and purpose of the parties, make a
significant change in the economic effect of the transactions contemplated
herein on Bank, or impair the validity or perfection of Bank’s security interest
in any Collateral or the validity of any

 

21

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guaranty or other security for the Liabilities, in which event a substitute
provision shall be supplied by the court in order to provide Bank with the
benefits intended by such invalid term or provision.  Borrower hereby expressly
acknowledges and agrees that Bank may share with and disclose to any participant
and any of Borrower’s other creditors information regarding Borrower, the
Liabilities and the Collateral as and when Bank determines is necessary or
convenient to establish and confirm to Bank’s and any participant’s and any
other creditor’s satisfaction Bank’s rights against Borrower and rights and
priority in the Collateral.  The table of contents hereto and the headings of
the sections, paragraphs and subdivisions of this Agreement are for convenience
of reference only, are not to be considered a part hereof, and shall not limit
or otherwise affect any of the terms hereof.

 

SECTION 16.       Compliance With Laws.

 

It is the intention of Bank and Borrower to conform strictly to any applicable
usury laws.  Accordingly, if the transactions contemplated hereby would be
usurious under any applicable law, then, in that event, notwithstanding anything
to the contrary in this Agreement, the other Loan Documents, or any other
agreement entered into in connection with or as security for or guaranteeing the
Notes, it is agreed as follows:  (i) the aggregate of all consideration which
constitutes interest under applicable law that is contracted for, taken,
reserved, charged, or received by Bank under or in connection with the Notes
shall under no circumstances exceed the Highest Lawful Rate (as defined below),
and any excess shall be canceled automatically and, if theretofore paid, shall,
at the option of Bank, be credited by Bank on the principal amount of any
indebtedness owed to Bank by Borrower or refunded by Bank to Borrower, and
(ii) in the event that the payment of the Notes is accelerated or in the event
of any required or permitted prepayment, then such consideration that
constitutes interest under law applicable to Bank may never include more than
the Highest Lawful Rate and excess interest, if any, to Bank provided for in
this Agreement or the other Loan Documents or otherwise with respect to the
Notes shall be canceled automatically as of the date of such acceleration or
prepayment and, if theretofore paid, shall, at the option of Bank, be .credited
by Bank on the principal amount of any indebtedness owed to Bank by Borrower or
refunded by Bank to Borrower.

 

“Highest Lawful Rate” means the maximum non-usurious interest rate that at any
time or from time to time may be contracted for, taken, reserved, charged, or
received on amounts due to Bank, under laws applicable to Bank with regard to
the Notes that are presently in effect or, to the extent allowed by law, under
such applicable laws that allow a higher maximum non-usurious rate than
applicable laws now allow.  No provision of this Agreement or of any other Loan
Documents shall require the payment or the collection of interest in excess of
the Highest Lawful Rate.  If any excess of interest in such respect is hereby
provided for, or shall be adjudicated to be so provided, in any other Loan
Documents or otherwise in connection with this loan transaction, the provisions
of this Section shall govern and prevail and neither Borrower nor the sureties,
guarantors, successors or assigns of Borrower shall be obligated to pay the
excess amount of such interest or any other excess sum paid for the use,
forbearance or detention of sums loaned pursuant hereto.  In the event Bank ever
receives, collects or applies as interest any such sum, such amount which would
be in excess of the maximum amount permitted by applicable law shall be applied
as a payment and reduction of the principal of the indebtedness evidenced by the
Notes; and, if the principal of the Notes has been paid in full, any remaining
excess shall forthwith be paid to Borrower.  In determining whether or not the
interest paid or payable exceeds the Highest Lawful Rate, Borrower and Bank
shall, to the extent permitted by applicable law, (a) characterize any
non-principal payment as an expense, fee or premium rather than as interest,
(b) exclude voluntary prepayments and the effects thereof and (c) amortize,
prorate, allocate and spread in equal or unequal parts the total amount of
interest throughout the entire contemplated term of the

 

22

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indebtedness evidenced by the Notes so that interest for the entire term does
not exceed the Highest Lawful Rate.

 

SECTION 17.       USA Patriot Act.

 

Bank hereby notifies Borrower that pursuant to the requirements of the USA
Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001))
(the “Act”), it is required to obtain, verify and record information that
identifies Borrower, which information includes the name and address of Borrower
and other information that will allow Bank to identify Borrower in accordance
with the Act.

 

SECTION 18.       ENTIRE AGREEMENT.

 

THIS AGREEMENT, THE NOTES AND THE OTHER LOAN DOCUMENTS REFERRED TO HEREIN EMBODY
THE FINAL, ENTIRE AGREEMENT AMONG THE PARTIES HERETO WITH RESPECT TO THE SUBJECT
MATTER HEREOF AND THEREOF AND SUPERSEDE ANY AND ALL PRIOR COMMITMENTS,
AGREEMENTS, REPRESENTATIONS AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL,
RELATING TO THE SUBJECT MATTER HEREOF AND THEREOF AND MAY NOT BE CONTRADICTED OR
VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEIOUS OR SUBSEQUENT ORAL AGREEMENTS OR
DISCUSSIONS OF THE PARTIES HERETO.  THERE ARE NO ORAL AGREEMENTS AMONG THE
PARTIES HERETO.

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK;
SIGNATURE PAGE FOLLOWS]

 

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IN WITNESS WHEREOF, the parties hereto have hereunder set their hands and seals
on this 31st day of May, 2007.

 

 

BORROWER:

 

 

 

TORNIER, INC.

 

 

 

 

 

By:

/s/James T. Hook

 

 

James T. Hook, its Vice President

 

 

 

 

 

 

 

By:

/s/ Michael J. Doty

 

 

Michael J. Doty, its Global CFO

 

 

 

 

BANK:

 

 

 

 

COMPASS BANK

 

 

 

 

 

 

 

By:

/s/Timothy D. Phillips

 

 

Timothy D. Phillips

 

 

its Executive Vice President

 

[NOTARIES ON THE FOLLOWING PAGE]

 

24

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ADDENDUM A

 

DEFINITIONS

 

1.             “Account” and “Account Receivable” shall mean and include all
accounts, accounts receivable, notes, notes receivable, contracts, contract
rights, retail installment sales contracts, drafts, documents, documents of
title, warehouse receipts, bills of lading, title retention and lien
instruments, security agreements, acceptances, instruments, conditional sales
contracts, chattel mortgages, chattel paper, general intangibles, and other
forms of obligation and rights to payment and receivables whether or not yet
earned by performance, including, without limitation, state and federal tax
refunds.

 

2.             “Account Debtor” shall mean the party who is obligated on or
under any Account Receivable.

 

3.             “Borrower’s Revolving Loan Account” shall mean the account on the
books of Bank in which Bank will record loans and advances under the Revolving
Line made by Bank to or on behalf of Borrower pursuant to the Agreement,
payments received on such loans and advances and other appropriate debits and
credits as provided by the Agreement or any of the other Loan Documents.

 

4.             “Collateral” shall mean any and all property in which Bank
acquired, now has, by this Agreement or any of the other Loan Documents (as
defined herein) acquires, or hereafter acquires a security interest or other
rights or interests as security for the Liabilities (as defined herein) and
without limiting the foregoing expressly includes the property described in
Section 4.1 of the Agreement.

 

5.             An “Eligible Account Receivable” shall mean an Account Receivable
of Borrower in which Bank holds a first perfected security interest which meets
each of the following requirements and is otherwise acceptable to Bank:

 

(a)           it arises from the sale or lease of goods or from services
rendered, such goods have been shipped or delivered to the Account Debtor under
such Account Receivable and such services have been fully performed and have
been accepted by the Account Debtor, and Borrower’s full right to payment for
all sums due from such Account Debtor with respect to such Account Receivable
shall have been earned and then be due and payable;

 

(b)           it is a valid and legally enforceable obligation of the Account
Debtor thereunder according to its express terms, and is not subject to any
offset, counterclaim, crossclaim, or other defense on the part of such Account
Debtor denying liability thereunder in whole or in part;

 

Addendum A-1

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(c)           it is not subject to any mortgage, lien, security interest, right
of a surety under a performance bond or otherwise or similar adverse rights or
interests whatsoever other than the security interests granted to Bank
hereunder;

 

(d)           it is evidenced by an invoice, dated the date of shipment (in the
case of goods sold or leased) or the date of performance (in the case of
services rendered) and having payment terms acceptable to Bank, rendered to such
Account Debtor, and is not evidenced by an instrument, note, draft, title
retention and lien instrument, security agreement, acceptance, conditional sales
contract, chattel mortgage or chattel paper and further, if requested by Bank, a
copy of such invoice shall have been delivered to and received by Bank;

 

(e)           it is not owing by an Account Debtor whose obligations with
respect to which Bank, acting in its discretion, shall have notified Borrower in
writing are not deemed to constitute an Eligible Account Receivable;

 

(f)            it is not due from an affiliated or related corporation or
entity, subsidiary corporation or entity, parent corporation or entity, or any
owner, officer, director, manager or employee of Borrower or of any such
affiliated, related, subsidiary, or parent corporation or entity, or any
individual who is a relative of any one or more of the foregoing by blood or
marriage;

 

(g)           it does not constitute, require or provide for progress billings,
retainages or deferred payments under a contract not fully performed;

 

(h)           it does not constitute, in whole or in part, interest or finance
charges on outstanding balances, any amount received as a down payment or
prepayment or other principal reduction or similar payment, any chargebacks or
contra amounts or accounts;

 

(i)            it is an Account Receivable with respect to which no return,
repossession, rejection, cancellation, or repudiation shall have occurred or
have been threatened;

 

(j)            it is an Account Receivable with respect to which Borrower
continues to be in full conformity with the representations, warranties and
covenants of Borrower made with respect thereto;

 

(k)           it is not subject to any sales terms, trial terms, sales-or-return
terms, consignment terms, guaranteed sales or performance terms, minimum sales
terms, C.O.D. terms, cash terms, or similar terms or conditions;

 

Addendum A-2

--------------------------------------------------------------------------------

 

(l)            it is not owed by an Account Debtor that is not an individual
residing in the United States or a corporation or partnership organized and
validly existing under the laws of a state within the United States unless the
payment of such Account is supported by a letter of credit in form and substance
and issued by an issuer acceptable to Bank;

 

(m)          it is not an Account Receivable subject, in whole or in part, to
any “bill and hold” or similar arrangement pursuant to which the invoice is
delivered prior to the actual delivery of the sold or leased goods or the
performance of the services;

 

(n)           it is not an Account Receivable with respect to which more than
ninety (90) days shall have passed since the earlier of (i) the relevant invoice
date, or (ii) the date that the obligation of the Account Debtor thereunder
arose and became due and payable;

 

(o)           it is not owed by any Account Debtor with respect to which ten
percent (10%) or more of its total Accounts owing to Borrower remain unpaid more
than ninety (90) days from invoice or earlier due date (the Bank may from time
to time, in its sole discretion, adjust the threshold percentage for individual
Account Debtors);

 

(p)           it is not an Account owed by an Account Debtor whose aggregate
Account balance with Borrower exceeds twenty percent (20%) of the total value of
Borrower’s total Accounts (the Bank may from time to time, in its sole
discretion, adjust the threshold percentage for individual Account Debtors); and

 

(q)           it is not an Account owed by the United States Government or any
other governmental body, agency, entity or authority.

 

8.             “Insolvency” of Borrower or any other person or entity shall mean
that there shall have occurred with respect to Borrower or such other person or
entity one or more of the following events:  dissolution, termination of
existence, liquidation, insolvency, business failure, appointment of a receiver
of any part of the property of, assignment for the benefit of creditors by or
against Borrower or such other person or entity, or institution of any action or
proceeding with respect to Borrower or such other person or entity under or
pursuant to any insolvency laws relating to the relief of debtors by or against
Borrower or such other person or entity, institution of proceedings in
bankruptcy or with respect to the readjustment of indebtedness, reorganization,
composition or extension by or against Borrower or such other person or entity
(including, without limitation, under or pursuant to the United States
Bankruptcy Code, as amended, or under any similar law at any time enacted), or
if any action shall be taken for the purpose of effecting any of the foregoing.

 

Addendum A-3

--------------------------------------------------------------------------------

 

9.                                      “Inventory” shall mean all of Borrower’s
inventory (as defined in the Uniform Commercial Code as enacted in the State of
Texas, or in any other jurisdiction) and all finished goods, other goods,
merchandise and other personal property now owned or hereafter acquired by
Borrower which are held for sale, lease, or rental or are furnished or to be
furnished under a contract of service and all raw materials, work in process,
component parts, materials or supplies used or to be used, or consumed or to be
consumed, in Borrower’s business, and related products and all goods represented
thereby, wherever located, and all such goods that may be reclaimed or
repossessed from or returned by Borrower’s customers, and all shipping and
packaging materials relating to any of the foregoing.

 

10.                               “Liabilities” and “Obligations” shall mean any
and all obligations, indebtedness and liabilities of Borrower to Bank or any
affiliate of Bank of every kind and description, whether direct or indirect,
absolute or contingent, joint or several, due or to become due, liquidated or
unliquidated, now existing or hereafter arising, and all extensions,
modifications, renewals, and refinancings thereof, regardless of how such
Liabilities arise or by what agreement or instrument (if any) they may be
evidenced and include obligations to perform acts and refrain from taking
actions as well as obligations to pay money.  Without limiting the foregoing,
Liabilities shall specifically include all liabilities and obligations of
Borrower hereunder and the obligation to repay the indebtedness evidenced by the
Note.  Without limiting the foregoing, Liabilities also shall include all
obligations heretofore, now or hereafter incurred by Borrower under any
agreement between Borrower and Bank or any affiliate of Bank, whether now
existing or hereafter entered into, including, without limitation, any agreement
which provides for an interest rate, currency, equity, credit or commodity swap,
cap, floor or collar, spot or foreign currency exchange transaction, cross
currency rate swap, currency option, any combination of, or option with respect
to, any of the foregoing or similar transactions, for the purpose of hedging
Borrower’s exposure to fluctuations in interest rates, exchange rates, currency,
stock, portfolio or loan valuations or commodity prices.

 

11.                               “Loan Documents” shall mean and include the
Note, the Agreement and any subordination agreements, intercreditor agreements
and other agreements, documents and instruments now or hereafter evidencing,
securing, guaranteeing or relating to the Revolving Line or any of the other
Liabilities, obligations or indebtedness of Borrower to Bank, as the same may be
amended.

 

12.                               “Net Worth” and “Current Maturities of Long
Term Debt” shall be defined and calculated in accordance with generally accepted
accounting principles consistently applied as of the date hereof.

 

13.                               “Permitted Liens” shall mean any of the
following (but only to the extent the same do not or could not, in Bank’s
reasonable opinion, jeopardize Bank’s rights or priority in or to any
Collateral):

 

(a)                                  liens of carriers, warehousemen, landlords,
mechanics, laborers and materialmen arising by law for sums which are (i) not
yet due or (ii) being diligently contested in good faith and with respect to
which Borrower has set aside sufficient reserves with Bank; and

 

(b)                                 liens for taxes which are (i) not yet due or
(ii) being diligently contested in good faith by appropriate proceedings and
with respect to which Borrower has set aside sufficient reserves with Bank.

 

Addendum A-4

--------------------------------------------------------------------------------

 

14.                               “Proceeds” shall mean all cash proceeds,
non-cash proceeds and all forms of payment and other property received or due
from the sale, lease, rental, transfer, disposition, licensing, collection, use
or exchange of property constituting Collateral hereunder and any and all claims
against any third party for loss of or damage to any Collateral, including
insurance, contract and tort claims, and further, without limiting the
generality of the foregoing, Proceeds shall include all Accounts, checks, cash,
money orders, drafts, chattel paper, general intangibles, instruments, notes and
other documents evidencing payment and payment obligations to Borrower for the
sale, lease, rental, transfer, disposition, licensing, collection, use or
exchange of Collateral.

 

15.                               “Real Property” means the real property
described on Exhibit D hereto and the improvements located thereon.

 

16.                               “Subordinated Debt” shall mean all such debts,
obligations or indebtedness owing from Borrower to others which have been and
remain subordinated to all Liabilities owing from Borrower to Bank pursuant to
Creditor’s Subordination Agreement(s) in form and substance acceptable to Bank.

 

17.                               “Tangible Net Worth” shall mean Borrower’s Net
Worth less (i) any and all loans and other advances to and investments in
Borrower’s affiliates, subsidiaries, owners, parent, employees, officers,
managers, directors or other related entities; (ii) notes, notes receivable,
accounts, accounts receivable, intercompany receivables, and other amounts owing
from Borrower’s affiliates, subsidiaries, owners, parent, employees, officers,
directors, managers or other related entities; and (iii) any and all goodwill
and other intangibles; plus Subordinated Debt.

 

18.                               “Total Debt” shall mean all of Borrower’s
indebtedness and liabilities owing to Bank or any other person or entity,
whether now or hereafter existing, created or arising, direct or indirect, joint
or several, including, without limitation, the Liabilities, minus Subordinated
Debt.

 

19.                               Any terms used to describe Bank’s security
interest under the Agreement not specifically defined in the Agreement shall
have the meanings and definitions given those terms under the Uniform Commercial
Code of Texas as may be amended.

 

Addendum A-5

--------------------------------------------------------------------------------

 

EXHIBIT A

 

BORROWING BASE REPORT

 

TO:                            Compass Bank

24 Greenway Plaza, Suite 1601

Houston, Texas 77046

Attention: Timothy D. Phillips

 

Ladies and Gentlemen:

 

The undersigned is an authorized representative of Tornier, Inc. (the
“Borrower”), and is authorized to make and deliver this report pursuant to that
certain Revolving Credit and Security Agreement dated as of May         , 2007
between the Borrower and Compass Bank (the “Bank”).  (Such Revolving Credit and
Security Agreement, as it may be amended is referred to as the “Loan
Agreement”).  All terms defined in the Loan Agreement shall have the same
meaning herein.

 

Pursuant to the terms and provisions of the Loan Agreement, the undersigned
hereby certifies that the following statements and information are true,
complete and correct:

 

(a)                                  The representations and warranties
contained in the Loan Agreement and in each of the other Loan Documents are true
and correct on and as of the date hereof with the same force and effect as if
made on and as of such date.

 

(b)                                 No event of default or Event of Default has
occurred and is continuing, and no event has occurred and is continuing that,
with the giving of notice or lapse of time or both, would be an event of default
or Event of Default.

 

(c)                                  Since the date of the financial statements
of Borrower most recently delivered to Lender pursuant to the Loan Agreement,
there has been no material adverse effect on Borrower or its parent, Tornier US
Holdings, Inc..

 

(d)                                 The amount of the outstanding advances under
the Revolving Line does not exceed the lesser of the Borrowing Base or
$6,000,000.00.

 

(e)                                  Attached hereto as Schedule 1 is a list of
Borrower’s accounts receivable, designating Eligible Accounts, aged in thirty
day intervals.

 

(f)                                    The total Eligible Accounts referred to
below represent the Eligible Accounts that qualify for purposes of determining
the Borrowing Base under the Loan Agreement.  Borrower represents and warrants
that the information and calculations set forth below regarding the Eligible
Accounts and the Borrowing Base are true and correct in all respects.

 

Exhibit A-1

--------------------------------------------------------------------------------

 

Calculation of Borrowing Base

 

1.

 

Total Accounts

 

$

 

 

 

 

 

 

 

 

2.

 

Ineligible Accounts

 

 

 

 

 

(a)

more than 90 days past earlier of (i) invoice date or (ii) due date

 

$

 

 

 

 

(b)

not in ordinary course of business or goods not in sole ownership of Borrower at
time of sale

 

$

 

 

 

 

(c)

conditional accounts

 

$

 

 

 

 

(d)

subject to consignment, sale or return, guaranteed sale or “bill and hold”

 

$

 

 

 

 

(e)

constitute pre-billings or unearned income

 

$

 

 

 

 

(f)

bonded or insured contracts

 

$

 

 

 

 

(g)

subject to a Lien, other than Lien to Bank under Loan Documents and other
permitted liens

 

$

 

 

 

 

(h)

subject to assignment restrictions

 

$

 

 

 

 

(i)

not subject to first priority perfected Lien in favor of Bank

 

$

 

 

 

 

(j)

accounts subject to dispute or setoff

 

$

 

 

 

 

(k)

accounts of insolvent or bankrupt account debtors

 

$

 

 

 

 

(1)

evidenced by chattel paper

 

$

 

 

 

 

(m)

foreign accounts

 

$

 

 

 

 

(n)

accounts of U.S. government

 

$

 

 

 

 

(o)

owed by an Affiliate of Borrower

 

$

 

 

 

 

(p)

more than 10% over 90 days

 

$

 

 

 

 

(q)

more than 20% concentration

 

$

 

 

 

 

 

 

 

 

Total

 

$

 

 

 

 

 

 

 

 

3.

 

Eligible Accounts [line (1) minus line (2)]

 

$

 

 

 

 

 

 

 

 

4.

 

Borrowing Base 80% of line (3)

 

$

 

 

 

 

 

 

 

 

5.

 

Commitment

 

$

6,000,000.00

 

 

 

 

 

 

 

6.

 

Lesser of line (4) or line (5)

 

$

 

 

 

 

 

 

 

 

7.

 

Amount of outstanding advances under Revolving Line

 

$

 

 

 

 

 

 

 

 

8.

 

Available Amount [line (6) minus line (7)]

 

$

 

 

 

Exhibit A-2

--------------------------------------------------------------------------------

 

Date:

 

 

 

 

 

TORNIER, INC.:

 

 

 

 

 

By:

 

 

Name:

 

 

Title:

 

 

Exhibit A-3

--------------------------------------------------------------------------------

 

Schedule 1 - List of Accounts Receivable

 

Exhibit A-4

--------------------------------------------------------------------------------

 

EXHIBIT B

 

CERTIFICATE

 

Reference is made to that certain Revolving Credit and Security Agreement (the
“Agreement”) executed by TORNIER, INC. (“Borrower”) in favor of COMPASS BANK
(“Bank”), on or about May       , 2007.  Capitalized terms used but not defined
herein shall have the meaning attributed to the same in the Agreement.  Borrower
hereby represents, warrants and covenants to and in favor of Bank as follows:

 

(1)                                  no default, event of default or Event of
Default (or any event that would constitute an event of default or Event of
Default but for the requirement that notice be given or time elapse or both) has
occurred or is continuing under the Agreement or any of the other Loan Documents
or under any other loans, notes, debentures, bonds, leases or other obligations
of Borrower now outstanding;

 

(2)                                  all representations, warranties and
covenants contained in the Agreement and the other Loan Documents are expressly
reaffirmed and restated as of the date hereof;

 

(3)                                  neither Borrower nor, to the best of
Borrower’s knowledge, any other party has any matured or unmatured claim, offset
or cause of action against Bank or its officers, agents or affiliates arising
under or in connection with the Loan Documents or the Liabilities; and

 

(4)                                  all financial statements, reports and other
documents delivered to Bank on or before the date hereof under or in connection
with the Loan Documents are, as of the relevant date, complete and accurate and
may be relied upon by Bank.

 

(5)                                  the calculations set forth below showing
Borrowers’ status of compliance with the financial covenants set forth in the
Agreement are true and correct in all respects.

 

Exhibit B-1

--------------------------------------------------------------------------------

 

Calculations Showing Compliance

 

Section 6.4 — Debt Service Coverage Ratio

 

Calculation:

 

1.

Net Income after taxes

 

 

 

 

(a)

 

This quarter

 

$

 

 

 

(b)

 

First preceding quarter

 

$

 

 

 

(c)

 

Second preceding quarter

 

$

 

 

 

(d)

 

Third preceding quarter

 

$

 

 

 

(e)

 

Total

 

$

 

 

2.

Interest Expense

 

 

 

 

(a)

 

This quarter

 

$

 

 

 

(b)

 

First preceding quarter

 

$

 

 

 

(c)

 

Second preceding quarter

 

$

 

 

 

(d)

 

Third preceding quarter

 

$

 

 

 

(e)

 

Total

 

$

 

 

3.

Depreciation and Amortization

 

 

 

 

(a)

 

This quarter

 

$

 

 

 

(b)

 

First preceding quarter

 

$

 

 

 

(c)

 

Second preceding quarter

 

$

 

 

 

(d)

 

Third preceding quarter

 

$

 

 

 

(e)

 

Total

 

$

 

 

4.

Dividends and Distributions

 

 

 

 

(a)

 

This quarter

 

$

 

 

 

(b)

 

First preceding quarter

 

$

 

 

 

(c)

 

Second preceding quarter

 

$

 

 

 

(d)

 

Third preceding quarter

 

$

 

 

 

(e)

 

Total

 

$

 

 

5.

Sum of line 1(e), plus line 2(e), plus line 3(e), less line 4(e)

 

$

 

 

6.

CMLTD

 

$

 

 

7.

Line 6 plus line 2(e)

 

$

 

 

8.

Debt Service Coverage Ratio

 

 

 

 

[line 6 divided by line 7] to 1.00

 

to 1.00

 

 

Required:

 

 

 

 

 

 

 

 

 

Not less than 1.25 to 1.00

 

 

 

 

Exhibit B-2

--------------------------------------------------------------------------------

 

Section 6.5 — Tangible Net Worth

 

Calculation:

 

1.

 

Net Worth

 

$

 

 

2.

 

Subordinated Debt

 

$

 

 

3.

 

Line (1) plus line (2)

 

$

 

 

4.

 

Related Party Loans, Advances and Investments

 

$

 

 

 

 

 

 

 

 

5.

 

Goodwill and Other Intangible Assets

 

$

 

 

6.

 

Line (4) plus line (5)

 

$

 

 

7.

 

Tangible Net Worth

 

 

 

 

 

[line (3) minus line (6)]

 

$

 

 

 

Required:

 

$12,000,000.00

 

Section 7.7 — Total Debt to Tangible Net Worth

 

Calculation:

 

1.

 

Total Debt

 

$

 

 

2.

 

Tangible Net Worth

 

 

 

 

 

 

[see above]

 

$

 

 

3.

 

Total Debt to Tangible Net Worth

 

 

 

 

 

[line (1) divided by line (2)]

 

 

 

 

Required:

 

Not greater than 1.50 to 1.00

 

 

 

TORNIER, INC.

 

 

 

 

 

By:

 

 

 

Its:

 

 

 

 

Date:

 

 

Exhibit B-3

--------------------------------------------------------------------------------

 

EXHIBIT C

 

ADVANCE REQUEST FORM

 

TO:                            Compass Bank

24 Greenway Plaza, Suite 1601

Houston, Texas 77046

Attention: Timothy D. Phillips

 

Ladies and Gentlemen:

 

The undersigned is an authorized representative of Tornier, Inc. (the
“Borrower”), and is authorized to make and deliver this certificate pursuant to
that certain Revolving Credit and Security Agreement dated as of May       ,
2007 between the Borrower and Compass Bank (the “Bank”).  (Such Revolving Credit
and Security Agreement, as it may be amended is referred to as the “Loan
Agreement”).  All terms defined in the Loan Agreement shall have the same
meaning herein.

 

Borrower hereby requests an advance under the Term Loan (the “Requested Term
Loan Advance”) in the amount of $                              in accordance
with the Loan Agreement.

 

In connection with the foregoing and pursuant to the terms and provisions of the
Loan Agreement, the undersigned hereby certify that the following statements and
information are true, complete and correct:

 

(i)                                     The representations and warranties
contained in the Loan Agreement and in each of the other Loan Documents are true
and correct on and as of the date hereof with the same force and effect as if
made on and as of such date.

 

(ii)                                  No event of default or Event of Default
has occurred and is continuing, and no event has occurred and is continuing
that, with the giving of notice or lapse of time or both, would be an event of
default or Event of Default.

 

(iii)                               Since the’ date of the financial statements
of Borrower most recently delivered to Lender pursuant to the Loan Agreement,
there has been no material adverse effect on Borrower or its parent, Tornier US
Holdings, Inc.

 

(iv)                              The amount of the Requested Term Loan Advance,
when added to the principal amount of all prior Term Loan Advances, will not
exceed $2,500,000.00.

 

Exhibit C-1

--------------------------------------------------------------------------------

 

Date:

 

 

 

 

 

 

BORROWER:

 

 

 

TORNIER, INC.:

 

 

 

 

 

By:

 

 

Name:

 

 

Title:

 

 

Exhibit C-2

--------------------------------------------------------------------------------

 

Exhibit “A”

 

Borrowing Base Report

(if applicable)

 

Exhibit C-3

--------------------------------------------------------------------------------

 

EXHIBIT D

 

REAL PROPERTY

 

Exhibit D-1

--------------------------------------------------------------------------------

 

MASTER REVOLVING PROMISSORY NOTE

 

$6,000,000.00

 

Houston, Texas

 

May 31, 2007

 

FOR VALUE RECEIVED, the undersigned, TORNIER, INC., a Delaware corporation
(“Maker”), hereby promises to pay to the order of COMPASS BANK, an Alabama
banking corporation (“Payee”), at its designated office, in lawful money of the
United States of America, the principal sum of SIX MILLION AND NO/100 DOLLARS
($6,000,000.00), or so much thereof as may be advanced and outstanding
hereunder, together with interest on the outstanding principal balance from day
to day remaining, at a varying rate per annum which shall from day to day be
equal to the lesser of (a) the Highest Lawful Rate (hereinafter defined) or (b)
the greater of (i) the sum of the LIBOR Rate (hereinafter defined) of Payee in
effect from day to day plus two percent (2%) or (ii) six and one-half percent
(6.50%), and each change in the rate of interest charged hereunder shall become
effective, without notice to Maker, on the effective date of each change in the
LIBOR Rate or the Highest Lawful Rate, as the case may be; provided, however, if
at any time the rate of interest specified in clause (b) preceding shall exceed
the Highest Lawful Rate, thereby causing the LIBOR rate hereon to be limited to
the Highest Lawful Rate, then any subsequent reduction in the Index Rate shall
not reduce the rate of interest hereon below the Highest Lawful Rate until the
total amount of interest accrued hereon equals the amount of interest which
would have accrued hereon if the rate specified in clause (b) preceding had at
all times been in effect. If an Event of Default (hereinafter defined) occurs,
the principal hereof shall bear interest at the Default Rate (hereinafter
defined.)

 

Principal of and interest on this Note shall be due and payable as follows:

 

(a)                                  Accrued and unpaid interest on this Note
shall be payable monthly, on the fifth (5th) day of each month commencing on
June 5, 2007 and upon the maturity of this Note, however such maturity may be
brought about; and

 

(b)                                 All outstanding principal of this Note and
all accrued interest hereon shall be due and payable on May         , 2008.

 

If any payment of principal or interest is made ten (10) or more days past the
date when due, Maker shall pay, immediately upon demand by Payee, and in
addition to regularly accruing interest, a delinquency charge in an amount equal
to five percent (5%) of the amount which was not paid when due. The provisions
of this paragraph shall not affect Payee’s right and remedies arising as a
result of such late payment or otherwise.

 

Principal of this Note shall be subject to mandatory prepayment at the times
described in Section 1.1(c) of the Agreement (hereinafter defined).

 

Interest on the indebtedness evidenced by this Note shall be computed on the
basis of a year of 360 days and the actual number of days elapsed (including the
first day but excluding the last day) unless such calculation would result in a
usurious rate in which case interest shall be calculated on the basis of a year
of 365 or 366 days, as the case may be.

 

As used in this Note, the following terms shall have the respective meanings
indicated below:

 

“Agreement” means that certain Revolving Credit and Security Agreement dated as
of May 31, 2007 between Maker and Payee, as the same may be amended or modified
from time to time.

 

--------------------------------------------------------------------------------

 

“Business Day” means any day on which commercial banks are not authorized or
required to close in Houston, Texas.

 

“Default Rate” means the lesser of (a) the sum of the stated rate to be borne by
this Note plus five percent (5%), or (b) the Highest Lawful Rate.

 

“Event of Default” shall have the meaning given to the term “event of default”
or “Event of Default” in the Agreement.

 

“Highest Lawful Rate” means the maximum rate of nonusurious interest permitted
from day to day by applicable law, including Chapter 303 of the Texas Finance
Code (the “Code”) (and as the same may be incorporated by reference in other
Texas statutes). To the extent that Chapter 303 of the Code is relevant to any
holder of this Note for the purposes of determining the Highest Lawful Rate,
each such holder elects to determine such applicable legal rate pursuant to the
“weekly ceiling,” from time to time in effect, as referred to and defined in
Chapter 303 of the Code; subject, however, to the limitations on such applicable
ceiling referred to and defined in the Code, and further subject to any right
such holder may have subsequently, under applicable law, to change the method of
determining the Highest Lawful Rate.

 

“Interest Period” means a period equal to the duration of the Reference Period;
provided, however, if the last day of an Interest Period would not fall on a
Business Day, then the Interest Period will end on the next following Business
Day. The initial Interest Period shall commence on the date of this Note, and
each succeeding Interest Period shall commence on the day immediately following
the expiration of the preceding Interest Period.

 

“LIBOR Rate” means the London Interbank Offered Rate for the applicable
Reference Period stated on Reuters Monitor Money Rates Service (“Reuters”) two
(2) Business Days before the first day of each Interest Period (or in the event
no such rate is stated on that date, the rate stated on the day most immediately
preceding the date of determination on which a rate was stated), as adjusted
from time to time in Lender’s sole discretion for then applicable reserve
requirements, deposit insurance assessment rates and other regulatory costs;
provided, however, that if such rate is not available on Reuters then such
offered rate shall be otherwise independently determined by Lender from an
alternate, substantially similar independent source available to Lender and
recognized in the banking industry. If Reuters states more than one (1) rate for
such Reference Period, the “LIBOR Rate” shall be the arithmetic mean of all
stated rates for such Reference Period.

 

“Reference Period” means one (1) month. This Reference Period is for reference
purposes only, and the actual Interest Periods under this Note may be for
periods of more than or less than one (1) month, depending on whether or not the
last day of the Interest Period falls on a Business Day.

 

This Note (a) is the Revolving Note provided for in the Agreement and (b) is
secured as provided in the Agreement. Maker may prepay the principal of this
Note upon the terms and conditions specified in the Agreement. Maker may borrow,
repay, and reborrow hereunder upon the terms and conditions specified in the
Agreement.

 

Notwithstanding anything to the contrary contained herein, no provisions of this
Note shall require the payment or permit the collection of interest in excess of
the Highest Lawful Rate. If any excess of interest in such respect is herein
provided for, or shall be adjudicated to be so provided, in this Note or
otherwise in connection with this loan transaction, the provisions of this
paragraph shall govern

 

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and prevail, and neither Maker nor the sureties, guarantors, successors or
assigns of Maker shall be obligated to pay the excess amount of such interest,
or any other excess sum paid for the use, forbearance or detention of sums
loaned pursuant hereto. If for any reason interest in excess of the Highest
Lawful Rate shall be deemed charged, required or permitted by any court of
competent jurisdiction, any such excess shall be applied as a payment and
reduction of the principal of indebtedness evidenced by this Note; and, if the
principal amount hereof has been paid in full, any remaining excess shall
forthwith be paid to Maker. In determining whether or not the interest paid or
payable exceeds the Highest Lawful Rate, Maker and Payee shall, to the extent
permitted by applicable law, (a) characterize any non-principal payment as an
expense, fee, or premium rather than as interest, (b) exclude voluntary
prepayments and the effects thereof, and (c) amortize, prorate, allocate, and
spread in equal or unequal parts the total amount of interest throughout the
entire contemplated term of the indebtedness evidenced by this Note so that the
interest for the entire term does not exceed the Highest Lawful Rate.

 

If default occurs in the payment of principal or interest under this Note, or
upon the occurrence of any other Event of Default, as such term is defined in
the Agreement, the holder hereof may, at its option, (a) declare the entire
unpaid principal of and accrued interest on this Note immediately due and
payable without notice, demand or presentment, all of which are hereby waived,
and upon such declaration, the same shall become and shall be immediately due
and payable, (b) foreclose or otherwise enforce all liens or security interests
securing payment hereof, or any part hereof, (c) offset against this Note any
sum or sums owed by the holder hereof to Maker and (d) take any and all other
actions available to Payee under this Note, the Agreement, the Loan Documents
(as such term is defined in the Agreement) at law, in equity or otherwise.
Failure of the holder hereof to exercise any of the foregoing options shall not
constitute a waiver of the right to exercise the same upon the occurrence of a
subsequent Event of Default.

 

In the event that an Event of Default exists and Payee decides to waive such
Event of Default or to forbear from taking action with respect to such Event of
Default, Maker shall pay to Payee, immediately upon demand by Payee, a waiver
fee (reasonable by industry standards) in an amount determined by Payee in its
sole and absolute discretion. The decision by Payee to waive any Event of
Default shall be made by Payee in its sole and absolute discretion, and Payee
has no obligation whatsoever to waive any Event of Default. The provisions of
this paragraph shall not affect Payee’s other rights or remedies.

 

If the holder hereof expends any effort in any attempt to enforce payment of all
or any part or installment of any sum due the holder hereunder, or if this Note
is placed in the hands of an attorney for collection, or if it is collected
through any legal proceedings, Maker agrees to pay all costs, expenses, and fees
incurred by the holder, including all reasonable attorneys’ fees.

 

THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF TEXAS AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. THIS
NOTE IS PERFORMABLE IN HARRIS COUNTY, TEXAS.

 

Maker and each surety, guarantor, endorser, and other party ever liable for
payment of any sums of money payable on this Note jointly and severally waive
notice, presentment, demand for payment, protest, notice of protest and
non-payment or dishonor, notice of acceleration, notice of intent to accelerate,
notice of intent to demand, diligence in collecting, grace, and all other
formalities of any kind, and consent to all extensions without notice for any
period or periods of time and partial payments, before or after maturity, and
any impairment of any collateral securing this Note, all without prejudice to
the holder. The holder shall similarly have the right to deal in any way, at any
time, with one or more of the foregoing parties without notice to any other
party, and to grant any such party any extensions of time for payment of any of
said indebtedness, or to release or substitute part or all of the collateral
securing this

 

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Note, or to grant any other indulgences or forbearances whatsoever, without
notice to any other party and without in any way affecting the personal
liability of any party hereunder.

 

Borrower agrees not to send Lender payments marked “paid in full”, “without
recourse”, or with similar language. If Borrower sends a payment, Lender may
accept it without losing any of Lender’s rights under this Note, and Borrower
will remain obligated to pay any further amounts owed or that may become owed to
Lender. All written communications concerning disputed amounts, including any
check or other payment instrument that indicates that the payment constitutes
“payment in full” of the amount owed or that is tendered with other conditions
or limitations or as full satisfaction of a disputed amount, must be mailed or
delivered to: Compass Bank, P.O. Box 3096, Birmingham, Alabama 35202.

 

The Note is executed in renewal, extension and increase of, and not in novation
or discharge of, that certain Master Revolving Promissory Note dated
November 16, 2006 executed by Maker in the original principal amount of
$4,000,000.00 and payable to the order of Payee, which note was executed in
renewal and extension of, and not in novation or discharge of, that certain
Master Revolving Promissory Note dated November 16, 2005 executed by Maker in
the original principal amount of $4,000,000.00 and payable to the order of
Payee, which note was executed in renewal, modification and increase of, and not
in novation or discharge of, that certain Master Revolving Promissory Note dated
June 21, 2005 executed by Maker in the original principal amount of
$2,000,000.00 and payable to the order of Payee, which note was executed in
modification of, and not in novation or discharge of that certain Master
Revolving Promissory Note dated March 21, 2005 executed by Maker in the original
principal amount of $2,000,000.00 and payable to the order of Payee.

 

 

 

TORNIER, INC.

 

 

 

 

 

By:

/s/James T. Hook

 

 

James T. Hook

 

 

Vice President

 

 

 

 

 

By:

 

 

Name:

 

 

Title:

 

 

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GUARANTY AGREEMENT

 

WHEREAS, the execution of this Guaranty Agreement is a condition to COMPASS
BANK, an Alabama state banking corporation (“Lender”) making certain loans to
TORNIER, INC., a Delaware corporation (“Borrower”), pursuant to that certain
Revolving Credit and Security Agreement dated as of even date herewith, between
Borrower and Lender (such Revolving Credit and Security Agreement as it may
hereafter be amended or modified from time to time, is hereinafter referred to
as the “Loan Agreement”);

 

NOW, THEREFORE, for valuable consideration, the receipt and adequacy of which
are hereby acknowledged, the undersigned, TORNIER US HOLDINGS, INC., a Delaware
corporation (the “Guarantor”), hereby irrevocably and unconditionally guarantees
to Lender the full and prompt payment and performance of the Guaranteed
Indebtedness (hereinafter defined).  This Guaranty Agreement shall be upon the
following terms:

 

1.             The term “Guaranteed Indebtedness”, as used herein means all of
the “Obligations” and “Liabilities” as defined in the Loan Agreement.  The term
“Guaranteed Indebtedness” shall include any and all post-petition interest and
expenses (including attorneys’ fees) whether or not allowed under any
bankruptcy, insolvency, or other similar law.  As of the date of this Guaranty
Agreement, the Obligations and Liabilities include, but are not limited to, the
indebtedness evidenced by that certain Master Revolving Promissory Note in the
original principal amount of $6,000,000.00, dated May 31, 2007, executed by
Borrower and payable to the order of Lender, (b) that certain Promissory Note in
the original principal amount of $2,500,000.00, dated May 31, 2007, executed by
Borrower and payable to the order of Lender and (c) that certain Promissory Note
dated August 29, 2005 in the original principal amount of $1,640,00.00, dated
August 29, 2005 executed by A.T. Real Estate, Inc., a Texas corporation, the
predecessor in interest by merger to the Borrower, as modified by that certain
Modification to Note and Deed of Trust dated as of June 15, 2006, by that
certain Modification Agreement dated as of June 15, 2006 and by that certain
Second Modification to Note, Deed of Trust and Assignment of Rents dated as of
May 31, 2007, and all renewals, extensions, amendments, increases, decreases or
other modifications of any of the foregoing and all promissory notes given in
renewal, extension, amendment, increase, decrease or other modification thereof.

 

2.             This instrument shall be an absolute, continuing, irrevocable,
and unconditional guaranty of payment and performance, and not a guaranty of
collection, and Guarantor shall remain liable on its obligations hereunder until
the payment and performance in full of the Guaranteed Indebtedness.  No set-off,
counterclaim, recoupment, reduction, or diminution of any obligation, or any
defense of any kind or nature which Borrower may have against Lender or any
other party, or which Guarantor may have against Borrower, Lender, or any other
party, shall be available to, or shall be

 

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asserted by, Guarantor against Lender or any subsequent holder of the Guaranteed
Indebtedness or any part thereof or against payment of the Guaranteed
Indebtedness or any part thereof.

 

3.             If Guarantor becomes liable for any indebtedness owing by
Borrower to Lender by endorsement or otherwise, other than under this Guaranty
Agreement, such liability shall not be in any manner impaired or affected
hereby, and the rights of Lender hereunder shall be cumulative of any and all
other rights that Lender may ever have against Guarantor.  The exercise by
Lender of any right or remedy hereunder or under any other instrument, or at law
or in equity, shall not preclude the concurrent or subsequent exercise of any
other right or remedy.

 

4.             In the event of default by Borrower in payment or performance of
the Guaranteed Indebtedness, or any part thereof, when such Guaranteed
Indebtedness becomes due, whether by its terms, by acceleration, or otherwise,
Guarantor shall promptly pay the amount due thereon to Lender without notice or
demand in lawful currency of the United States of America and it shall not be
necessary for Lender, in order to enforce such payment by Guarantor, first to
institute suit or exhaust its remedies against Borrower or others liable on such
Guaranteed Indebtedness, or to enforce any rights against any collateral which
shall ever have been given to secure such Guaranteed Indebtedness.  Until the
Guaranteed Indebtedness is paid in full and a period of ninety (90) days has
passed following such payment, Guarantor waives any and all rights it may now or
hereafter have under any agreement or at law or in equity (including, without
limitation, any law subrogating the Guarantor to the rights of Lender) to assert
any claim against or seek contribution, indemnification or any other form of
reimbursement from Borrower or any other party liable for payment of any or all
of the Guaranteed Indebtedness for any payment made by Guarantor under or in
connection with this Guaranty Agreement or otherwise.

 

5.             If acceleration of the time for payment of any amount payable by
Borrower under the Guaranteed Indebtedness is stayed upon the insolvency,
bankruptcy, or reorganization of Borrower, all such amounts otherwise subject to
acceleration under the terms of the Guaranteed Indebtedness shall nonetheless be
payable by Guarantor hereunder forthwith on demand by Lender.

 

6.             Guarantor hereby agrees that its obligations under this Guaranty
Agreement shall not be released, discharged, diminished, impaired, reduced, or
affected for any reason or by the occurrence of any event, including, without
limitation, one or more of the following events, whether or not with notice to
or the consent of Guarantor:  (a) the taking or accepting of collateral as
security for any or all of the Guaranteed Indebtedness or the release,
surrender, exchange, or subordination of any collateral now or hereafter
securing any or all of the Guaranteed Indebtedness; (b) any partial release of
the liability of Guarantor hereunder, or the full or partial release of any
other guarantor from liability for any or all of the Guaranteed Indebtedness;
(c) any disability of Borrower, or the dissolution, insolvency, or bankruptcy of
Borrower, Guarantor, or any other party at any time liable for the payment of
any or all of the Guaranteed Indebtedness; (d) any renewal, extension,
modification, waiver, amendment, or rearrangement of any or all of the

 

2

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Guaranteed Indebtedness or any instrument, document, or agreement evidencing,
securing, or otherwise relating to any or all of the Guaranteed Indebtedness;
(e) any adjustment, indulgence, forbearance, waiver, or compromise that may be
granted or given by Lender to Borrower, Guarantor, or any other party ever
liable for any or all of the Guaranteed Indebtedness; (f) any neglect, delay,
omission, failure, or refusal of Lender to take or prosecute any action for the
collection of any of the Guaranteed Indebtedness or to foreclose or take or
prosecute any action in connection with any instrument, document, or agreement
evidencing, securing, or otherwise relating to any or all of the Guaranteed
Indebtedness; (g) the unenforceability or invalidity of any or all of the
Guaranteed Indebtedness or of any instrument, document, or agreement evidencing,
securing, or otherwise relating to any or all of the Guaranteed Indebtedness;
(h) any payment by Borrower or any other party to Lender is held to constitute a
preference under applicable bankruptcy or insolvency law or if for any other
reason Lender is required to refund any payment or pay the amount thereof to
someone else (i) the settlement or compromise of any of the Guaranteed
Indebtedness; (j) the non-perfection of any security interest or lien securing
any or all of the Guaranteed Indebtedness; (k) any impairment of any collateral
securing any or all of the Guaranteed Indebtedness; (l) the failure of Lender to
sell any collateral securing any or all of the Guaranteed Indebtedness in a
commercially reasonable manner or as otherwise required by law; (m) any change
in the corporate existence, structure, or ownership of Borrower; or (n) any
other circumstance which might otherwise constitute a defense available to, or
discharge of, Borrower or Guarantor.

 

7.             Guarantor represents and warrants to Lender as follows:

 

(a)           Guarantor is a corporation duly organized, validly existing and in
good standing under the laws of the state of its incorporation, is qualified to
do business in all jurisdictions in which the nature of the business conducted
by it makes such qualification necessary and where failure to so qualify would
have a material adverse effect on its business, financial condition, or
operations.

 

(b)           Guarantor has the corporate power, authority and legal right to
execute, deliver, and perform its obligations under this Guaranty Agreement and
this Guaranty Agreement constitutes the legal, valid, and binding obligation of
Guarantor, enforceable against Guarantor in accordance with its respective
terms, except as limited by bankruptcy, insolvency, or other laws of general
application relating to the enforcement of creditor’s rights.

 

(c)           The execution, delivery, and performance by Guarantor of this
Guaranty Agreement have been duly authorized by all requisite action on the part
of Guarantor and do not and will not violate or conflict with the certificate of
incorporation or bylaws of Guarantor or any law, rule, or regulation or any
order, writ, injunction or decree of any court, governmental authority or
agency, or arbitrator and do not and will not conflict with, result in a breach
of, or constitute a default under, or result in the imposition of any lien upon
any assets of Guarantor pursuant to the provisions of any indenture, mortgage,
deed of trust, security agreement, franchise, permit, license, or other
instrument or agreement to which Guarantor or its properties is bound.

 

3

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(d)           No authorization, approval, or consent of, and no filing or
registration with, any court, governmental authority, or third party is
necessary for the execution, delivery or performance by Guarantor of this
Guaranty Agreement or the validity or enforceability thereof.

 

(e)           The value of the consideration received and to be received by
Guarantor as a result of Borrower and Lender entering into the Loan Agreement
and Guarantor executing and delivering this Guaranty Agreement is reasonably
worth at least as much as the liability and obligation of Guarantor hereunder,
and such liability and obligation and the Loan Agreement have benefitted and may
reasonably be expected to benefit Guarantor directly or indirectly.

 

(f)            Guarantor represents and warrants to Lender that Guarantor is not
insolvent, Guarantor’s liabilities do not exceed its assets, and Guarantor will
not be rendered insolvent by the execution and performance of this Guaranty
Agreement and the Loan Documents (as defined in the Loan Agreement).

 

(g)           Guarantor makes to Lender the representations and warranties
contained in the Loan Agreement which Borrower makes in the Loan Agreement with
respect to Guarantor, as if Guarantor were a party to the Loan Agreement, and
all of such representations and warranties with respect to Guarantor are
incorporated herein by reference.

 

8.             Guarantor covenants and agrees that, as long as the Guaranteed
Indebtedness or any part thereof is outstanding or Lender has any commitment
under the Loan Agreement:

 

(a)           Guarantor will deliver to Lender the financial statements of
Guarantor described in the Loan Agreement at the times required by the Loan
Agreement.

 

(b)           Guarantor will furnish promptly to Lender written notice of the
occurrence of any default under this Guaranty Agreement or an Event of Default
as defined in the Loan Agreement of which Guarantor has knowledge.

 

(c)           Guarantor will furnish promptly to Lender such additional
information concerning Guarantor as Lender may request.

 

(d)           Guarantor will not (i) become a party to a merger, consolidation
or other business combination or acquire all or a substantial part of the assets
of any Person (as defined in the Loan Agreement) or any shares or other evidence
of beneficial ownership of any Person unless guarantor is the surviving Person
to such transaction, (ii) dissolve or liquidate, or (iii) sell, lease, assign,
transfer or otherwise dispose of substantially all of its assets.

 

(e)           Guarantor will always own at least 80 % of the outstanding stock
of Borrower.

 

4

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(f)            Guarantor will comply with all of the covenants contained in the
Loan Agreement with which Borrower agrees in the Loan Agreement to cause
Guarantor to comply, as if Guarantor were a party to the Loan Agreement, and all
of such covenants are incorporated herein by reference as if set forth herein in
full.

 

9.             Upon the occurrence of an Event of Default Lender shall have the
right to set off and apply against this Guaranty Agreement or the Guaranteed
Indebtedness or both, at any time and without notice to Guarantor, any and all
deposits (general or special, time or demand, provisional or final) or other
sums at any time credited by or owing from Lender to Guarantor whether or not
the Guaranteed Indebtedness is then due and irrespective of whether or not
Lender shall have made any demand under this Guaranty Agreement.  In addition to
Lender’s right of setoff and as further security for this Guaranty Agreement and
the Guaranteed Indebtedness, Guarantor hereby grants Lender a security interest
in all deposits (general or special, time or demand, provisional or final) and
all other accounts of Guarantor now or hereafter on deposit with or held by
Lender and all other sums at any time credited by or owing from Lender to
Guarantor.  The rights and remedies of Lender hereunder are in addition to other
rights and remedies (including, without limitation, other rights of setoff)
which Lender may have.

 

10.           Guarantor hereby agrees that the Subordinated Indebtedness shall
be subordinate and junior in right of payment to the prior payment in full of
all Guaranteed Indebtedness, and Guarantor hereby assigns the Subordinated
Indebtedness to Lender as security for the Guaranteed Indebtedness.  If any sums
shall be paid to Guarantor by Borrower or any other person or entity on account
of the Subordinated Indebtedness, such sums shall be held in trust by Guarantor
for the benefit of Lender and shall forthwith be paid to Lender without
affecting the liability of Guarantor under this Guaranty Agreement.  For
purposes of this Guaranty Agreement, the term “Subordinated Indebtedness” means
all indebtedness, liabilities, and obligations of Borrower to Guarantor, whether
such indebtedness, liabilities, and obligations now exist or are hereafter
incurred or arise, or whether the obligations of Borrower thereon are direct,
indirect, contingent, primary, secondary, several, joint and several, or
otherwise, and irrespective of the person or persons in whose favor such
indebtedness, obligations, or liabilities may, at their inception, have been, or
may hereafter be created, or the manner in which they have been or may hereafter
be acquired by Guarantor.

 

11.           No amendment or waiver of any provision of this Guaranty Agreement
or consent to any departure by the Guarantor therefrom shall in any event be
effective unless the same shall be in writing and signed by Lender.  No failure
on the part of Lender to exercise, and no delay in exercising, any right, power,
or privilege hereunder shall operate as a waiver thereof; nor shall any single
or partial exercise of any right, power, or privilege hereunder preclude any
other or further exercise thereof or the exercise of any other right, power, or
privilege.  The remedies herein provided are cumulative and not exclusive of any
remedies provided by law.

 

12.           This Guaranty Agreement is for the benefit of Lender and its
successors and assigns, and in the event of an assignment of the Guaranteed
Indebtedness, or any part thereof, the rights and benefits hereunder, to the
extent applicable to the indebtedness so

 

5

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assigned, may be transferred with such indebtedness.  This Guaranty Agreement is
binding not only on Guarantor, but on Guarantor’s successors and assigns.

 

13.           Guarantor recognizes that Lender is relying upon this Guaranty
Agreement and the undertakings of Guarantor hereunder in making extensions of
credit to Borrower under the Loan Agreement and further recognizes that the
execution and delivery of this Guaranty Agreement is a material inducement to
Lender in entering into the Loan Agreement.  Guarantor hereby acknowledges that
there are no conditions to the full effectiveness of this Guaranty Agreement.

 

14.           This Guaranty Agreement is executed and delivered as an incident
to a lending transaction negotiated, consummated, and performable in Harris
County, Texas, and shall be governed by and construed in accordance with the
laws of the State of Texas.  Any action or proceeding against Guarantor under or
in connection with this Guaranty Agreement may be brought in any state or
federal court in Harris County, Texas, and Guarantor hereby irrevocably submits
to the nonexclusive jurisdiction of such courts, and waives any objection it may
now or hereafter have as to the venue of any such action or proceeding brought
in such court.  Guarantor agrees that service of process upon it may be made by
certified or registered mail, return receipt requested, at its address specified
in the Loan Agreement.  Nothing herein shall affect the right of Lender to serve
process in any other matter permitted by law or shall limit the right of Lender
to bring any action or proceeding against Guarantor or with respect to any of
Guarantor’s property in courts in other jurisdictions.  Any action or proceeding
by Guarantor against Lender shall be brought only in a court located in Harris
County, Texas.

 

15.           Guarantor shall pay on demand all attorneys’ fees and all other
costs and expenses incurred by Lender in connection with the preparation,
administration, enforcement, or collection of this Guaranty Agreement.

 

16.           Guarantor hereby waives promptness, diligence, notice of any
default under the Guaranteed Indebtedness, demand of payment, notice of
acceptance of this Guaranty Agreement, presentment, notice of protest, notice of
dishonor, notice of the incurring by Borrower of additional indebtedness, and
all other notices and demands with respect to the Guaranteed Indebtedness and
this Guaranty Agreement.

 

17.           The Loan Agreement, and all of the terms thereof, are incorporated
herein by reference, the same as if stated verbatim herein, and Guarantor agrees
that Lender may exercise any and all rights granted to it under the Loan
Agreement and the other Loan Documents without affecting the validity or
enforceability of this Guaranty Agreement.  Any notices given hereunder shall be
given in the manner provided by and to the addresses set forth in the Loan
Agreement.

 

18.           Guarantor hereby represents and warrants to Lender that Guarantor
has adequate means to obtain from Borrower on a continuing basis information
concerning the financial condition and assets of Borrower and that Guarantor is
not relying upon Lender to provide (and Lender shall have no duty to provide)
any such information to Guarantor either now or in the future.

 

6

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19.           THIS GUARANTY AGREEMENT EMBODIES THE FINAL, ENTIRE AGREEMENT OF
GUARANTOR AND LENDER WITH RESPECT TO GUARANTOR’S GUARANTY OF THE GUARANTEED
INDEBTEDNESS AND SUPERSEDES ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS,
REPRESENTATIONS, AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE
SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OR OTHER
EXTRINSIC EVIDENCE OF ANY NATURE.  THERE ARE NO ORAL AGREEMENTS BETWEEN
GUARANTOR AND LENDER.  THIS GUARANTY AGREEMENT MAY NOT BE AMENDED EXCEPT IN
WRITING BY GUARANTOR AND LENDER.

 

DATED AND EXECUTED as of May 31, 2007.

 

 

GUARANTOR:

 

 

 

TORNIER US HOLDINGS, INC.

 

 

 

By:

/s/Michael S. Doty

 

Name:

Michael S. Doty

 

Title:

Global CFO

 

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