Document:

exv10w3

EXHIBIT 10.3

SECURITY AGREEMENT

	 	 	 
	 

	 	Date: August 26, 2008

DEBTOR: WSI Industries, Inc., a Minnesota corporation

Address: 213 Chelsea Road, Monticello, MN 55362

Federal Tax I.D. No. 41-0691697

State Charter No. K-680

SECURED PARTY: M&I Marshall & Ilsley Bank

Address: 11455 Viking Drive, Eden Prairie MN 55344

1. OBLIGATIONS SECURED. This Agreement secures the following (called the “Obligations”):

	 	 	All debts, liabilities and obligations of every type and description which the Debtor may
now or at any time owe to the Secured Party, including but not limited to all principal,
interest, and other charges, fees, expenses and amounts, and all notes, guaranties,
agreements, and other writings in favor of the Secured Party, whether now existing or
hereafter arising, direct or indirect, due or to become due, absolute or contingent, primary
or secondary, liquidated or unliquidated, independent, joint, several, or joint and several.

2. SECURITY INTEREST. To secure the payment and performance of the Obligations, the Debtor grants
the Secured Party a security interest (the “Security Interest”) in, and assigns to the Secured
Party, the following property (called the “Collateral”):

	 	 	All inventory of the Debtor, and all returns of such inventory, and all warehouse receipts,
bills of lading and other documents of title covering such inventory, whether now existing
or hereafter arising, whether now owned or hereafter acquired;
	 
	 	 	All equipment of the Debtor, together with all accessions, accessories, attachments,
fittings, increases, parts, repairs, returns, renewals and substitutions of all or any part
thereof, and all warehouse receipts, bills of lading and other documents covering such
equipment, whether now existing or hereafter arising, whether now owned or hereafter
acquired;
	 
	 	 	All accounts (including but not limited to all health-care-insurance receivables),
instruments, chattel paper, investment property, letter of credit rights, letters of credit,
other rights to payment, documents, deposit accounts, money, patents, patent applications,
trademarks, trademark applications, copyrights, copyright applications, trade names, other
names, software, payment intangibles, and other general intangibles of the Debtor, together
with all good will related to the foregoing property and all rights, liens, security
interests and other interests which the Debtor may at any time have by law or agreement
against any account debtor, issuer or
obligor obligated to make any such payment or against any of the property of such account debtor, issuer, or

 

 

		 	obligor, and all
supporting obligations relating to the foregoing, whether now existing or hereafter arising,
whether now owned or hereafter acquired;
	 
	 	 	All other assets of the Debtor, not described above; and
	 
	 	 	All products and proceeds of the foregoing property, including without limitation all
accounts, instruments, chattel paper, investment property, letter of credit rights, letters
of credit, other rights to payment, documents, deposit accounts, money, insurance proceeds
and general intangibles related to the foregoing property, and all refunds of insurance
premiums due or to become due under all insurance policies covering the foregoing property.

3. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. The Debtor
represents and warrants to the Secured Party and agrees as follows:

	 	a.        The Debtor is a Minnesota corporation and the address of the Debtor’s chief executive
office is shown at the beginning of this Agreement. The Debtor has not used any trade name,
assumed name, or other name except the Debtor’s name stated above and its former names
“Washington Scientific Industries, Inc.,” “Taurus Numeric Tool, Inc.,” “Bowman Tool
& Machining, Inc.,” “WSI South, Inc.,” “Washington Scientific Industries of CA, Inc.,” and
“Advanced Custom Molders, Inc.” The Debtor shall not change its state of organization
without the Secured Party’s prior written consent. The Debtor shall give the Secured Party
prior written notice of any change in such address or the Debtor’s name or if the Debtor
uses any other name. The Debtor has authority to execute and perform this Agreement. The
Debtor’s federal tax identification number is shown above.
	 
	 	b.        If any Collateral is or will become a fixture, the record owner of the real estate is:
Debtor and the legal description of the real estate is: See Attached Exhibit A.
	 
	 	c.        Except as set forth in any existing or future agreement executed by the Secured Party:
the Debtor is the owner of the Collateral, or will be the owner of the Collateral hereafter
acquired, free of all security interests, liens and encumbrances other than the Security
Interest and any other security interest of the Secured Party; the Debtor shall not permit
any security interest, lien or encumbrance, other than the Security Interest and any other
security interest of the Secured Party, to attach to any Collateral without the prior
written consent of the Secured Party; the Debtor shall defend the Collateral against the
claims and demands of all persons and entities other than the Secured Party, and shall
promptly pay all taxes, assessments and other government charges upon or against the Debtor,
any Collateral and the Security Interest; and no financing statement covering any Collateral
is on file in any public office. If any Collateral is or will become a fixture the Debtor,
at the request of the Secured Party, shall furnish the Secured Party with a statement or
statements executed by all persons and entities who have or claim an
interest in the real estate, in a form acceptable to the Secured Party, which statement or
statements shall provide that such persons and entities consent to the Security Interest.

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	 	d.        The Debtor shall not sell or otherwise dispose of any Collateral or any interest therein
without the prior written consent of the Secured Party, which consent shall not be
unreasonably withheld, except that, until the occurrence of an Event of Default or the
revocation by the Secured Party of the Debtor’s right to do so, the Debtor may sell or lease
any Collateral constituting inventory in the ordinary course of business at prices
constituting the fair market value thereof. For purposes of this Agreement, a transfer in
partial or total satisfaction of a debt, obligation or liability shall not constitute a sale
or lease in the ordinary course of business.
	 
	 	e.        Each account, instrument, investment property, chattel paper, letter-of-credit right,
letter of credit, other right to payment, document, and general intangible constituting
Collateral is, or will be when acquired, the valid, genuine and legally enforceable
obligation of the account debtor or other issuer or obligor named therein or in the Debtor’s
records pertaining thereto as being obligated to pay such obligation, subject to no defense,
setoff or counterclaim. The Debtor shall not, without the prior written consent of the
Secured Party, agree to any material modification or amendment of any such obligation or
agree to any subordination or cancellation of any such obligation.
	 
	 	f.        Other than inventory in transit and motor vehicles in use, all tangible Collateral shall
be located at the Debtor’s address stated above and no such Collateral shall be located at
any other address without the prior written consent of the Secured Party.
	 
	 	g.        The Debtor shall: (i) keep all tangible Collateral in good condition and repair,
normal depreciation excepted; (ii) from time to time replace any worn, broken or defective
parts thereof; (iii) promptly notify the Secured Party of any loss of or material damage to
any Collateral or of any adverse change in the prospect of payment of any account,
instrument, chattel paper, letter of credit other right to payment or general intangible
constituting Collateral; (iv) not permit any Collateral to be used or kept for any unlawful
purpose or in violation of any federal, state or local law; (v) keep all tangible Collateral
insured in such amounts, against such risks and in such companies as shall be acceptable to
the Secured Party, with lender loss payable clauses in favor of the Secured Party to the
extent of its interest in form acceptable to the Secured Party (including without limitation
a provision for at least 30 days prior written notice to the Secured Party of any
cancellation or modification of such insurance), and deliver policies or certificates of
such insurance to the Secured Party; (vi) at the Debtor’s chief executive office, keep
accurate and complete records pertaining to the Collateral and the Debtor’s financial
condition, business and property, and Provide the Secured Party such periodic reports
concerning the Collateral and the Debtor’s financial condition, business and property as the
Secured Party may from time to time request; (vii) at all reasonable times permit the
Secured Party and its representatives to examine and inspect any Collateral, and to examine,
inspect and copy the Debtor’s records pertaining to the Collateral and
the Debtor’s financial condition, business and property; and (viii) at the Secured Party’s
request, promptly execute, endorse and deliver such financing statements and other instruments, documents, control
agreements, chattel paper and

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writings and take such other actions deemed by the Secured Party to be necessary or
desirable to establish, protect, perfect or enforce the Security Interest and the rights of
the Secured Party under this Agreement and applicable law, and pay all costs of filing
financing statements and other writings in all public offices where filing is deemed by the
Secured Party to be necessary or desirable.

h.        The Debtor authorizes the Secured Party to file all of the Secured Party’s financing
statements and amendments to financing statement, and all terminations of the filings of
other secured parties, all with respect to the Collateral, in such form and substance as the
Secured Party, in its sole discretion, may determine.

4. COLLECTION RIGHTS. At any time after an Event of Default, the Secured Party may, and at
the request of the Secured Party the Debtor shall, promptly notify any account debtor, issuer or
obligor of an account, instrument, investment property, chattel paper, letter-of-credit right,
letter of credit, other right to payment or general intangible constituting Collateral that the
same has been assigned to the Secured Party and direct such account debtor, issuer or obligor to
make all future payments to the Secured Party. In addition, at the request of the Secured Party,
the Debtor shall deposit in a collateral account designated by the Secured Party all proceeds
constituting Collateral, in their original form received (with any necessary endorsement), within
one business day after receipt of such proceeds by the Debtor. Until the Debtor makes each such
deposit, the Debtor will hold all such proceeds separately in trust for the Secured Party for
deposit in such collateral account, and will not commingle any such proceeds with any other
property. The Debtor shall have no right to withdraw any funds from such collateral account, and
the Debtor shall have no control over such collateral account. Such collateral account and all
funds at any time therein shall constitute Collateral under this Agreement. Before or upon final
collection of any funds in such collateral account, the Secured Party, at its discretion, may
release any such funds to the Debtor or any account of the Debtor or apply any such funds to the
Obligations whether or not then due. Any release of funds to the Debtor or any account of the
Debtor shall not prevent the Secured Party from subsequently applying any funds to the
Obligations. All items credited to such collateral account and subsequently returned and all
other costs, fees and charges of the Secured Party in connection with such collateral account may
be charged by the Secured Party to any account of the Debtor, and the Debtor shall pay the Secured
Party all such amounts on demand.

5. LIMITED POWER OF ATTORNEY. If the Debtor at any time fails to perform or observe any
agreement herein, the Secured Party, in the name and on behalf of the Debtor or, at its option, in
its own name, may perform or observe such agreement and take any action which the Secured Party
may deem necessary or desirable to cure or correct such failure. The Debtor irrevocably
authorizes Secured Party and grants the Secured Party a limited power of attorney in the name and
on behalf of the Debtor or, at its option, in its own name, to collect, receive, receipt for,
create, prepare, complete, execute, endorse, deliver and file any and all financing statements,
control agreements, insurance applications, remittances, instruments, documents, chattel paper and
other writings, to grant any extension to, compromise, settle, waive, notify, amend, adjust,
change and release any obligation of any account debtor, issuer, obligor, insurer or other person
or entity pertaining to any Collateral, to demand terminations

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 of other security interests in any of the Collateral and to take any other action deemed by the
Secured Party to be necessary or desirable to establish, perfect, protect or enforce the Security
Interest. All of the Secured Party’s advances, fees, charges, costs and expenses, including but
not limited to audit fees and expenses and reasonable attorneys’ fees and legal expenses, in
connection with the Obligations and in the protection and exercise of any rights or remedies
hereunder, together with interest thereon at the highest rate then applicable to any of the
Obligations, shall be secured hereunder and shall be paid by the Debtor to the Secured Party on
demand.

6. EVENTS OF DEFAULT. The occurrence of any of the following events shall constitute an
“Event of Default”: (a) any breach or default in the payment or performance of any of the
Obligations; or (b) any breach or default under the terms of this Agreement or any other note,
obligation, mortgage, deed of trust, assignment, guaranty, other agreement, or other writing
heretofore, herewith or hereafter existing to which the Debtor or any maker, endorser, guarantor
or surety of any of the Obligations or any other person or entity providing security for any of
the Obligations or for any guaranty of any of the Obligations is a party; or (c) the insolvency,
dissolution, liquidation, merger or consolidation of the Debtor or any such maker, endorser,
guarantor, surety or other person or entity; or (d) any appointment of a receiver, trustee or
similar officer of any property of the Debtor or any such maker, endorser, guarantor, surety or
other person or entity; or (e) any assignment for the benefit of creditors of the Debtor or any
such maker, endorser, guarantor, surety or other person or entity; or (f) any commencement of any
proceeding under any bankruptcy, insolvency, receivership, dissolution, liquidation or similar law
by or against the Debtor or any such maker, endorser, guarantor, surety or other person or entity;
or (g) the sale, lease or other disposition (whether in one or more transactions) to one or more
persons or entities of all or a substantial part of the assets of the Debtor or any such maker,
endorser, guarantor, surety or other person or entity; or (h) the Debtor or any such maker,
endorser, guarantor, surety or other person or entity takes any action to go out of business, or
to revoke or terminate any agreement, liability or security in favor of the Secured Party; or (i)
the entry of any judgment or other order for the payment of money in the amount of $50,000.00 or
more against the Debtor or any such maker, endorser, guarantor, surety or any other person or
entity, and the continuance of such judgment, or order unsatisfied and in effect for any period of
60 consecutive days without a stay of execution; or j) the issuance or levy of any writ, warrant,
attachment, garnishment, execution or other process against any property of the Debtor or any such
maker, endorser, guarantor, surety or any other person or entity; or (k) the attachment of any tax
lien to any property of the Debtor or any such maker, endorser, guarantor, surety or other person
or entity; or (1) any statement, representation or warranty made by the Debtor or any such maker,
endorser, guarantor, surety or other person or entity (or any representative of the Debtor or any
such maker, endorser, guarantor, surety or other person or entity) to the Secured Party at any
time shall be incorrect or misleading in any material respect when made; or (m) there is a
material adverse change in the condition (financial or otherwise), business or property of the
Debtor or any such maker, endorser, guarantor, surety or other person or entity; or (n) the
Secured Party shall in good faith believe that the prospect for due and punctual payment or
performance of any of the Obligations, this Agreement or any other note, obligation, mortgage,
deed of trust,
assignment, guaranty, or other agreement

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heretofore, herewith or hereafter given to or acquired by
the Secured Party in connection with any of the Obligations is impaired.

     7. REMEDIES. Upon the commencement of any proceeding under any bankruptcy law by or against
the Debtor or any such maker, endorser, guarantor, surety or other person or entity, all
Obligations automatically shall become immediately due and payable in full, without declaration,
presentment, or other notice or demand, all of which are hereby waived by the Debtor. In
addition, upon the occurrence of any Event of Default and at any time thereafter, the Secured
Party may exercise any one or more of the following rights and remedies: (a) declare all
Obligations to be immediately due and payable in full, and the same shall thereupon be immediately
due and payable in full, without presentment or other notice or demand, all of which are hereby
waived by the Debtor; (b) require the Debtor to assemble all or any part of the Collateral and
make it available to the Secured Party at a place to be designated by the Secured Party which is
reasonably convenient to both parties; (c) exercise and enforce any and all rights and remedies
available upon default under this Agreement, the Minnesota Uniform Commercial Code, as amended
from time to time (the “UCC”), and any other applicable agreements and laws. If notice to the
Debtor of any intended disposition of Collateral or other action is required, such notice shall be
deemed reasonably and properly given if mailed by regular or certified mail, postage prepaid, to
the Debtor at the address stated at the beginning of this Agreement or at the most recent address
shown in the Secured Party’s records, at least 10 days prior to the action described in such
notice. The Debtor consents to the personal jurisdiction of the state and federal courts located
in the State of Minnesota in connection with any controversy related to this Agreement, the
Collateral, the Security Interest or any of the Obligations, waives any argument that venue in
such forums is not convenient, and agrees that any litigation initiated by the Debtor against the
Secured Party in connection with this Agreement, the Collateral, the Security Interest or any of
the Obligations shall be venued in either the District Court of Hennepin County, Minnesota or
the United States District Court, District of Minnesota, Fourth Division.

8. MISCELLANEOUS. All terms in this Agreement that are defined in the UCC shall have the
meanings set forth in the UCC, and such meanings shall automatically change at the time that any
amendment to the UCC, which changes such meanings, shall become effective. A carbon, photographic
or other reproduction of this Agreement is sufficient as a financing statement. No provision of
this Agreement can be waived, modified, amended, abridged, supplemented, terminated or discharged
and the Security Interest cannot be released or terminated, except by a writing duly executed by
the Secured Party. A waiver shall be effective only in the specific instance and for the specific
purpose given. No delay or failure to act shall preclude the exercise or enforcement of any of the
Secured Party’s rights or remedies. All rights and remedies of the Secured Party shall be
cumulative and may be exercised singularly, concurrently or successively at the Secured Party’s
option, and the exercise or enforcement of any one such right or remedy shall not be a condition to
or bar the exercise or enforcement of any other. No notice or other communication by the Debtor to
the Secured Party, which relates to any of the Obligations, the Security Interest or the
Collateral, shall be effective until it is received by the Secured Party at the Secured Party’s
address above. This Agreement shall bind and benefit the Debtor and the Secured Party and their
respective heirs, representatives, successors and assigns and shall take
effect when executed by the Debtor and

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 delivered to the Secured Party, and the Debtor waives
notice of the Secured Party’s acceptance hereof. If any provision or application of this Agreement
is held unlawful or unenforceable in any respect, such illegality or unenforceability shall not
affect other provisions or applications which can be given effect, and this Agreement shall be
construed as if the unlawful or unenforceable provision or application had never been contained
herein or prescribed hereby. All representations and warranties contained in this Agreement shall
survive the execution, delivery and performance of this Agreement and the creation, payment and
performance of the Obligations. This Agreement and the rights and duties of the parties shall be
governed by and construed in accordance with the internal laws of the State of Minnesota (excluding
conflict of law rules).

THE DEBTOR REPRESENTS AND WARRANTS TO THE SECURED PARTY AND AGREES THAT THE DEBTOR HAS READ ALL OF
THIS AGREEMENT AND UNDERSTANDS ALL OF THE PROVISIONS OF THIS AGREEMENT.

	 	 	 	 	 	 	 
	 	 	WSI INDUSTRIES, INC., a Minnesota corporation	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Paul D. Sheely	 	 
	 

	 	 	 	 

     Paul D. Sheely
	 	 
	 
	 	 	 	 	 	 
	 

	 	Its:
	 	Vice President/Chief Financial Officer	 	 
	 

	 	 	 	 	 	 

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EXHIBIT A

LEGAL DESCRIPTION

Lot 1, Block 1, Remmele Addition, Wright County, Minnesota.

-8-exv10w4

EXHIBIT 10.4

GUARANTY BY CORPORATION

Minneapolis, Minnesota

August 26, 2008

          For good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, and to induce M&I Marshall & Ilsley Bank, a Wisconsin State banking corporation
(herein, with its participants, successors and assigns, called “Bank”), at its option, at any time
or from time to time to make loans or extend other accommodations to or for the account of WSI
Industries, Inc., a Minnesota corporation (herein called “Borrower”) or to engage in any other
transactions with Borrower, the undersigned hereby absolutely and unconditionally guarantees to the
Bank the full and prompt payment when due, whether at maturity or earlier by reason of acceleration
or otherwise, of the debts, liabilities and obligations described as follows:

     The undersigned guarantee(s) to Bank the payment and performance of each and every debt,
liability and obligation of every type and description which Borrower may now or at any time
hereafter owe to Bank (whether such debt, liability or obligation now exists or is hereafter
created or incurred, and whether it is or may be direct or indirect, due or to become due, absolute
or contingent, primary or secondary, liquidated or unliquidated, or joint, several or joint and
several, all such debts, liabilities and obligations being hereinafter collectively referred to as
the “Indebtedness”) without limitation, this Guaranty includes the following described obligations:
That certain Promissory Note, Loan Agreement, and Security Agreement executed by Borrower in favor
of Bank of even date herewith and any extensions, renewals or replacements thereof (hereinafter
referred to as the “Indebtedness”).

     The term “Indebtedness” as used in this guaranty shall not include any obligations entered
into between Borrower and Bank after the date hereof (including any extensions, renewals or
replacements of such obligations) for which Borrower meets the Bank’s standard of creditworthiness
based on Borrower’s own assets and income without the addition of a guaranty, or for which a
guaranty is required but Borrower chooses someone other than the joint undersigned to guaranty the
obligation.

     The undersigned further acknowledges and agrees with Bank that:

     1. No act or thing need occur to establish the liability of the undersigned hereunder, and no
act or thing, except full payment and discharge of all Indebtedness, shall in any way exonerate the
undersigned or modify, reduce, limit or release the liability of the undersigned hereunder.

     2. This is an absolute, unconditional and continuing guaranty of payment of the Indebtedness
and shall continue to be in force and be binding upon the undersigned, whether or not all
Indebtedness is paid in full, until this guaranty is revoked by written notice actually received by
the Bank, and such revocation shall not be effective as to Indebtedness existing or committed for
at the time of actual receipt of such notice by the Bank, or as to any renewals, extensions and
refinancings thereof. The undersigned represents and warrants to the Bank that the undersigned has
a direct and substantial economic interest in Borrower and expects to derive substantial benefits
therefrom and from any loans and financial accommodations resulting in the creation of Indebtedness
guaranteed hereby, and that this guaranty is given for a corporate purpose. The undersigned agrees
to rely exclusively on the right to revoke this guaranty prospectively as to future transactions by
written notice actually received by the Bank if at any time, in the opinion of the directors or
officers of the undersigned, the corporate benefits then being received by the undersigned in
connection with this guaranty are not sufficient to warrant the continuance of this guaranty as to
future Indebtedness. Accordingly, so long as this guaranty is not revoked
prospectively in accordance with this guaranty, the Bank may rely conclusively on a continuing
warranty, hereby made, that the undersigned continues to be benefited by this guaranty and the Bank
shall have no duty to inquire into or confirm

 

 

the receipt of any such benefits, and this guaranty
shall be effective and enforceable by the Bank without regard to the receipt, nature of value of
any such benefits.

     3. If the undersigned shall be dissolved or shall be or become insolvent (however defined)
then the Bank shall have the right to declare immediately due and payable, and the undersigned will
forthwith pay to the Bank, the total amount of all Indebtedness, whether due and payable or
unmatured. It the undersigned voluntarily commences or there is commenced involuntarily against
the undersigned a case under the United States Bankruptcy Code, the full amount of all
Indebtedness, whether due and payable or unmatured, shall be immediately due and payable without
demand or notice thereof.

     4. The liability of the undersigned hereunder shall be limited to a principal amount of $
UNLIMITED (if unlimited or if no amount is stated, the undersigned shall be liable for all
Indebtedness, without any limitation as to amount), plus accrued interest thereon and all
attorneys’ fees, collection costs and enforcement expenses referable thereto. Indebtedness may be
created and continued in any amount, whether or not in excess of such principal amount, without
affecting or impairing the liability of the undersigned hereunder. The Bank may apply any sums
received by or available to the Bank on account of the Indebtedness from Borrower or any other
person (except the undersigned), from their properties, out of any collateral security or from any
other source to payment of the excess. Such application of receipts shall not reduce, affect or
impair the liability of the undersigned hereunder. If the liability of the undersigned is limited
to a stated amount pursuant to this paragraph 4, any payment made by the undersigned under this
guaranty shall be effective to reduce or discharge such liability only if accompanied by a written
transmittal document, received by the Bank, advising the Bank that such payment is made under this
guaranty for such purpose.

     5. The undersigned shall pay or reimburse the Bank for all costs and expenses (including
reasonable attorneys’ fees and legal expenses) incurred by the Bank in connection with the
protection, defense or enforcement of this guaranty in any litigation or bankruptcy or insolvency
proceedings.

     6. Whether or not any existing relationship between the undersigned and Borrower has been
changed or ended and whether or not this guaranty has been revoked, the Bank may, but shall not be
obligated to, enter into transactions resulting in the creation or continuance of Indebtedness,
without any consent or approval by the undersigned and without any notice to the undersigned. The
liability of the undersigned shall not be affected or impaired by any of the following acts or
things (which the Bank is expressly authorized to do, or suffer from time to time, both before and
after revocation of this guaranty, without notice to or approval by the undersigned): (i) any
acceptance of collateral security, guarantors, accommodation parties or sureties for any or all
Indebtedness; (ii) any one or more extensions or renewals of Indebtedness (whether or not for
longer than the original period) or any modification of the interest rates, maturities or other
contractual terms applicable to any Indebtedness; (iii) any waiver, adjustment, forbearance,
compromise or indulgence granted to Borrower, any delay or lack of diligence in the enforcement of
Indebtedness, or any failure to institute proceedings, file a claim, give any required notices or
otherwise protect any Indebtedness, (iv) any full or partial release of, settlement with, or
agreement not to sue, Borrower or any other guarantor or other person liable in respect of any
Indebtedness; (v) any discharge of any evidence of Indebtedness or the acceptance of any instrument
in renewal thereof of substitution therefor; (vi) any failure to obtain collateral security
(including rights of setoff) for Indebtedness, or to see to the proper or sufficient creation and
perfection thereof, or to establish the priority thereof, or to protect, insure, or enforce any
collateral security; or any release, modification, substitution, discharge, impairment,
deterioration, waste or loss of any collateral security; (vii) any foreclosure or enforcement of
any collateral security; (viii) any transfer of any Indebtedness or any evidence thereof; (ix) any
order of
application of any payments or credits upon Indebtedness; (x) any election by the Bank under
§1111(b)(2) of the United States Bankruptcy Code.

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     7. The undersigned waive(s) any and all defenses, claims and discharges of Borrower, or any
other obligor, pertaining to Indebtedness, except the defense of discharge by payment in full.
Without limiting the generality of the foregoing, the undersigned will not assert, plead or enforce
against the Bank any defense of waiver, release, statute of limitations, res judicata, statute of
frauds, fraud, incapacity, minority, usury, illegality or unenforceability which may be available
to Borrower or any other person liable in respect of any Indebtedness, or any setoff available
against the Bank to Borrower or any such other person, whether or not on account of a related
transaction. The undersigned expressly agree(s) that the undersigned shall be and remain liable,
to the fullest extent permitted by applicable law, for any deficiency remaining after foreclosure
of any mortgage or security interest securing Indebtedness, whether or not the liability of
Borrower or any other obligor for such deficiency is discharged pursuant to statute or judicial
decision. The undersigned shall remain obligated, to the fullest extent permitted by law, to pay
such amounts as though the Borrower’s obligations had not been discharged.

     8. The undersigned further agrees that the undersigned shall be and remain obligated to pay
Indebtedness even though any other person obligated to pay Indebtedness, including Borrower, has
such obligation discharged in bankruptcy or otherwise discharged by law. “Indebtedness” shall
include post-bankruptcy petition interest and attorneys’ fees and any other amounts which Borrower
is discharged from paying or which do not otherwise accrue to Indebtedness due to Borrower’s
discharge, and the undersigned shall remain obligated to pay such amounts as though Borrower’s
obligations had not been discharged.

     9. If any payment applied by the Bank to Indebtedness is thereafter set aside, recovered,
rescinded of required to be returned for any reason (including, without limitation, the bankruptcy,
insolvency or reorganization of Borrower or any other obligor), the Indebtedness to which such
payment was applied shall for the purposes of this guaranty be deemed to have continued in
existence, notwithstanding such application, and this guaranty shall be enforceable as to such
Indebtedness as fully as if such application had never been made.

     10. Until the Indebtedness is irrevocably paid in full, the undersigned waive(s) any claim,
remedy or other right which the undersigned may now have or hereafter acquire against Borrower or
any other person obligated to pay Indebtedness arising out of the creation or performance of the
undersigned’s obligation under this guaranty, including, without limitation, any right of
subrogation, contribution, reimbursement, indemnification, exoneration, and any right to
participate in any claim or remedy the undersigned may have against the Borrower, collateral, or
other party obligated for Borrower’s debts, whether or not such claim, remedy or right arises in
equity, or under contract, statute or common law.

     11. The undersigned waive(s) presentment, demand for payment, notice of dishonor or
nonpayment, and protest of any instrument evidencing Indebtedness. The Bank shall not be required
first to resort for payment of the Indebtedness to Borrower or other persons or their properties,
of first to enforce, realize upon or exhaust any collateral security for Indebtedness, before
enforcing this guaranty.

     12. The liability of the undersigned under this guaranty is in addition to and shall be
cumulative with all other liabilities of the undersigned to the Bank as guarantor or otherwise,
without any limitation as to amount unless the instrument or agreement evidencing or creating such
other liability specifically provides to the contrary.

     13. The undersigned represents and warrants to the Bank that (i) the undersigned is a
corporation duly organized and existing in good standing and has full power and authority to make
and deliver this guaranty; (ii)
the execution, delivery and performance of this guaranty by the undersigned have been duly
authorized by all necessary action of its directors and shareholders and do not and will not
violate the provisions of, or constitute a default under, any presently applicable law or its
articles of incorporation or by-laws or any agreement presently biding on it; (iii) this guaranty
has been duly executed and delivered by the authorized officers of the undersigned

-3-

 

and constitutes
its lawful, binding and legally enforceable obligation (subject to the United States Bankruptcy
Code and other similar laws generally affecting the enforcement of creditors’ rights); and (iv) the
authorization, execution, delivery and performance of this guaranty do not require notification to,
registration with, or consent or approval by, any federal, state or local regulatory body or
administrative agency.

     14. This guaranty shall be enforceable against each person signing this guaranty, even it only
one person signs and regardless of any failure of other persons to sign this guaranty. If there be
more than one signer, all agreements and promises herein shall be construed to be, and are hereby
declared to be, joint and several in each of every particular and shall be fully binding upon and
enforceable against either, any or all the undersigned. This guaranty shall be effective upon
delivery to the Bank, without further act, condition or acceptance by the Bank, shall be binding
upon the undersigned and the heirs, representatives, successors and assigns of the undersigned and
shall inure to the benefit of the Bank and its participants, successors and assigns. Any
invalidity or unenforceability of any provision or application of this guaranty shall not affect
other lawful provisions and application hereof, and to this end the provisions of this guaranty are
declared to be severable. Except as authorized by the terms herein, this guaranty may not be
waived, modified, amended, terminated, released or otherwise changed except by a writing signed by
the undersigned and the Bank. This guaranty shall be governed by the laws of the State of
Minnesota. The undersigned waive(s) notice of the Bank’s acceptance hereof and waive(s) the right
to a trial by jury in any action based on or pertaining to this guaranty.

     15. This guaranty is security agreement dated of even date herewith.

          IN WITNESS WHEREOF, this guaranty has been duly executed by the undersigned the day and year
first above written.

	 	 	 	 	 	 	 
	 	 	TAURUS NUMERIC TOOL, INC., a Minnesota corporation	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Paul D. Sheely	 	 
	 

	 	 	 	 

     Paul D. Sheely
	 	 
	 
	 	 	 	 	 	 
	 

	 	Its:
	 	Vice President/Chief Financial Officer	 	 
	 

	 	 	 	 	 	 

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