Document:

Exhibit 10.1

 

 

 

CREDIT AND SECURITY AGREEMENT

 

BY AND BETWEEN

 

WATERS INSTRUMENTS, INC.

 

AND

 

WELLS FARGO BUSINESS CREDIT, INC.

 

 

September 7, 2004

 

 

 

TABLE OF CONTENTS

 

	
  ARTICLE
  I DEFINITIONS

  	
   

  
	
   

  	
   

  
	
   

  	
  Section 1.1

  	
  Definitions.

  	
   

  
	
   

  	
  Section 1.2

  	
  Other Definitional Terms; Rules of
  Interpretation. .

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE
  II AMOUNT AND TERMS OF THE CREDIT FACILITY

  	
   

  
	
   

  	
   

  
	
   

  	
  Section 2.1

  	
  Revolving Advances.

  	
   

  
	
   

  	
  Section 2.2

  	
  Procedures for Requesting Advances.

  	
   

  
	
   

  	
  Section 2.3

  	
  Letters of Credit.

  	
   

  
	
   

  	
  Section 2.4

  	
  Special Account.

  	
   

  
	
   

  	
  Section 2.5

  	
  Equipment Term Advance.

  	
   

  
	
   

  	
  Section 2.6

  	
  Payment of Equipment Term Note.

  	
   

  
	
   

  	
  Section 2.7

  	
  Real Estate Term Advance.

  	
   

  
	
   

  	
  Section 2.8

  	
  Payment of Real Estate Term Note.

  	
   

  
	
   

  	
  Section 2.9

  	
  Interest; Margin; Minimum Interest Charge;
  Default Interest; Clearance Days; Participations; Usury.

  	
   

  
	
   

  	
  Section 2.10

  	
  Fees.

  	
   

  
	
   

  	
  Section
  2.11

  	
  Time
  for Interest Payments; Payment on Non-Business Days; Computation of Interest
  and Fees.

  	
   

  
	
   

  	
  Section
  2.12

  	
  Lockbox
  and Collateral Account; Application of Payments.

  	
   

  
	
   

  	
  Section
  2.13

  	
  Voluntary
  Prepayment; Reduction of the Maximum Line; Termination of the Credit Facility
  by the Borrower.

  	
   

  
	
   

  	
  Section 2.14

  	
  Mandatory
  Prepayment.

  	
   

  
	
   

  	
  Section
  2.15

  	
  Revolving
  Advances to Pay Obligations.

  	
   

  
	
   

  	
  Section 2.16

  	
  Use of Proceeds.

  	
   

  
	
   

  	
  Section 2.17

  	
  Liability Records.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE III SECURITY INTEREST; OCCUPANCY;
  SETOFF

  	
   

  
	
   

  	
   

  
	
   

  	
  Section 3.1

  	
  Grant of Security
  Interest.

  	
   

  
	
   

  	
  Section
  3.2

  	
  Notification
  of Account Debtors and Other Obligors.

  	
   

  
	
   

  	
  Section 3.3

  	
  Assignment of
  Insurance.

  	
   

  
	
   

  	
  Section 3.4

  	
  Occupancy.

  	
   

  
	
   

  	
  Section 3.5

  	
  License.

  	
   

  
	
   

  	
  Section 3.6

  	
  Financing Statement.

  	
   

  
	
   

  	
  Section 3.7

  	
  Setoff.

  	
   

  
	
   

  	
  Section 3.8

  	
  Collateral.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE IV CONDITIONS OF LENDING

  	
   

  
	
   

  	
   

  
	
   

  	
  Section
  4.1

  	
  Conditions
  Precedent to the Initial Advances and Letter of Credit.

  	
   

  
	
   

  	
  Section 4.2

  	
  Conditions Precedent to All
  Advances and Letters of Credit.

  	
   

  

 

i

 

	
  ARTICLE V REPRESENTATIONS AND WARRANTIES

  	
   

  
	
   

  	
   

  
	
   

  	
  Section 5.1

  	
  Existence and Power;
  Name; Chief Executive Office; Inventory and Equipment Locations; Federal
  Employer Identification Number and Organizational Identification Number.

  	
   

  
	
   

  	
  Section 5.2

  	
  Capitalization.

  	
   

  
	
   

  	
  Section 5.3

  	
  Authorization of
  Borrowing; No Conflict as to Law or Agreements.

  	
   

  
	
   

  	
  Section 5.4

  	
  Legal Agreements.

  	
   

  
	
   

  	
  Section 5.5

  	
  Subsidiaries.

  	
   

  
	
   

  	
  Section 5.6

  	
  Financial Condition;
  No Adverse Change.

  	
   

  
	
   

  	
  Section 5.7

  	
  Litigation.

  	
   

  
	
   

  	
  Section 5.8

  	
  Regulation U.

  	
   

  
	
   

  	
  Section 5.9

  	
  Taxes.

  	
   

  
	
   

  	
  Section 5.10

  	
  Titles and Liens.

  	
   

  
	
   

  	
  Section 5.11

  	
  Intellectual
  Property Rights.

  	
   

  
	
   

  	
  Section 5.12

  	
  Plans.

  	
   

  
	
   

  	
  Section 5.13

  	
  Default.

  	
   

  
	
   

  	
  Section 5.14

  	
  Environmental
  Matters.

  	
   

  
	
   

  	
  Section 5.15

  	
  Submissions to Lender.

  	
   

  
	
   

  	
  Section 5.16

  	
  Financing Statements.

  	
   

  
	
   

  	
  Section 5.17

  	
  Rights to Payment.

  	
   

  
	
   

  	
  Section 5.18

  	
  Financial Solvency.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE VI COVENANTS

  	
   

  
	
   

  	
   

  
	
   

  	
  Section 6.1

  	
  Reporting Requirements.

  	
   

  
	
   

  	
  Section 6.2

  	
  Financial Covenants.

  	
   

  
	
   

  	
  Section 6.3

  	
  Permitted Liens;
  Financing Statements.

  	
   

  
	
   

  	
  Section 6.4

  	
  Indebtedness.

  	
   

  
	
   

  	
  Section 6.5

  	
  Guaranties.

  	
   

  
	
   

  	
  Section 6.6

  	
  Investments and Subsidiaries.

  	
   

  
	
   

  	
  Section 6.7

  	
  Dividends and Distributions.

  	
   

  
	
   

  	
  Section 6.8

  	
  Salaries.

  	
   

  
	
   

  	
  Section 6.9

  	
  Key Person Life
  Insurance.

  	
   

  
	
   

  	
  Section
  6.10

  	
  Books
  and Records; Collateral Examination, Inspection and Appraisals.

  	
   

  
	
   

  	
  Section 6.11

  	
  Account Verification.

  	
   

  
	
   

  	
  Section 6.12

  	
  Compliance with
  Laws.

  	
   

  
	
   

  	
  Section 6.13

  	
  Payment of Taxes and Other
  Claims.

  	
   

  
	
   

  	
  Section 6.14

  	
  Maintenance of Properties.

  	
   

  
	
   

  	
  Section 6.15

  	
  Insurance.

  	
   

  
	
   

  	
  Section 6.16

  	
  Preservation of Existence

  	
   

  
	
   

  	
  Section 6.17

  	
  Delivery of
  Instruments, etc.

  	
   

  
	
   

  	
  Section
  6.18

  	
  Sale or
  Transfer of Assets; Suspension of Business Operations.

  	
   

  
	
   

  	
  Section 6.19

  	
  Consolidation
  and Merger; Asset Acquisitions.

  	
   

  
	
   

  	
  Section 6.20

  	
  Sale and Leaseback.

  	
   

  

 

ii

 

	
   

  	
  Section 6.21

  	
  Restrictions on Nature
  of Business.

  	
   

  
	
   

  	
  Section 6.22

  	
  Accounting.

  	
   

  
	
   

  	
  Section 6.23

  	
  Discounts, etc.

  	
   

  
	
   

  	
  Section 6.24

  	
  Plans.

  	
   

  
	
   

  	
  Section 6.25

  	
  Place of Business; Name.

  	
   

  
	
   

  	
  Section 6.26

  	
  Constituent Documents; S
  Corporation Status.

  	
   

  
	
   

  	
  Section 6.27

  	
  Performance by the Lender.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE VII EVENTS OF DEFAULT, RIGHTS AND
  REMEDIES

  	
   

  
	
   

  	
   

  
	
   

  	
  Section 7.1

  	
  Events of Default.

  	
   

  
	
   

  	
  Section 7.2

  	
  Rights and Remedies.

  	
   

  
	
   

  	
  Section 7.3

  	
  Certain Notices.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE VIII MISCELLANEOUS

  	
   

  
	
   

  	
   

  
	
   

  	
  Section 8.1

  	
  No Waiver; Cumulative Remedies;
  Compliance with Laws.

  	
   

  
	
   

  	
  Section 8.2

  	
  Amendments, Etc.

  	
   

  
	
   

  	
  Section 8.3

  	
  Notices; Communication of
  Confidential Information; Requests for Accounting

  	
   

  
	
   

  	
  Section 8.4

  	
  Further Documents.

  	
   

  
	
   

  	
  Section 8.5

  	
  Costs and Expenses.

  	
   

  
	
   

  	
  Section 8.6

  	
  Indemnity

  	
   

  
	
   

  	
  Section 8.7

  	
  Participants.

  	
   

  
	
   

  	
  Section 8.8

  	
  Execution in
  Counterparts; Telefacsimile Execution.

  	
   

  
	
   

  	
  Section 8.9

  	
  Retention of
  Borrower’s Records.

  	
   

  
	
   

  	
  Section 8.10

  	
  Binding Effect;
  Assignment; Complete Agreement; Sharing Information.

  	
   

  
	
   

  	
  Section 8.11

  	
  Severability of Provisions.

  	
   

  
	
   

  	
  Section 8.12

  	
  Headings.

  	
   

  
	
   

  	
  Section 8.13

  	
  Governing Law; Jurisdiction,
  Venue; Waiver of Jury Trial.

  	
   

  

 

iii

 

CREDIT AND SECURITY AGREEMENT

 

Dated as of September 7, 2004

 

WATERS INSTRUMENTS, INC., a Minnesota corporation (the
“Borrower”), and WELLS FARGO BUSINESS CREDIT, INC., a Minnesota corporation
(the “Lender”), hereby agree as follows:

 

ARTICLE I

 

DEFINITIONS

 

Section 1.1             Definitions.  For all purposes of this Agreement, except as
otherwise expressly provided, the following terms shall have the meanings
assigned to them in this Section or in the Section referenced after such term:

 

“Accounts” means all of the Borrower’s accounts, as
such term is defined in the UCC, including each and every right of the Borrower
to the payment of money, whether such right to payment now exists or hereafter
arises, whether such right to payment arises out of a sale, lease or other
disposition of goods or other property, out of a rendering of services, out of
a loan, out of the overpayment of taxes or other liabilities, or otherwise
arises under any contract or agreement, whether such right to payment is created,
generated or earned by the Borrower or by some other person who subsequently
transfers such person’s interest to the Borrower, whether such right to payment
is or is not already earned by performance, and howsoever such right to payment
may be evidenced, together with all other rights and interests (including all
Liens) which the Borrower may at any time have by law or agreement against any
account debtor or other obligor obligated to make any such payment or against
any property of such account debtor or other obligor; all including but not
limited to all present and future accounts, contract rights, loans and
obligations receivable, chattel papers, bonds, notes and other debt
instruments, tax refunds and rights to payment in the nature of general intangibles.  Accounts will not include accounts owned or
originated by any Subsidiary, except to the extent such Subsidiary is
designated a co-borrower hereunder, or the Lender receives a guaranty from such
Subsidiary and in either case receives a security agreement from such
Subsidiary granting a security interest in such accounts securing repayment of
the Obligations, and such other documents, opinions and instruments as the
Lender may in its sole discretion determine are required to permit such
accounts to be deemed Accounts for purposes of this Agreement.

 

“Accounts Advance Rate” means up to eighty percent
(80%), or such lesser rate as the Lender in its sole discretion may deem
appropriate from time to time.

 

“Advance” means a Revolving Advance or a Term Advance.

 

“Affiliate” or “Affiliates” means Zareba Europe  and any other Person controlled by,
controlling or under common control with the Borrower, including any Subsidiary
of the Borrower.  For purposes of this
definition, “control,” when used with respect to any specified 

 

 

Person, means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise.

 

“Agreement” means this Credit and Security Agreement.

 

“Availability” means the amount, if any, by which the
Borrowing Base exceeds the sum of (i) the outstanding principal balance of the
Revolving Note and (ii) the L/C Amount.

 

“Borrowing Base” means at any time the lesser of:

 

(a)           The Maximum Line; or

 

(b)           Subject to change from time to time in the Lender’s
sole discretion, the sum of:

 

(i)            The
product of the Accounts Advance Rate times Eligible Accounts, plus

 

(ii)           The lesser
of (A) the product of the Finished Goods Inventory Advance Rate times Eligible
Finished Goods Inventory, plus the product of the Raw Material Inventory
Advance Rate times Eligible Raw Material Inventory or (B) $3,000,000.00, plus

 

(iii)          During
the period commencing September 1, 2004 through April 30, 2005,
$500,000.00, less

 

(iv)          The Borrowing
Base Reserve, less

 

(v)           The Wells
Fargo Bank Obligations Reserve.

 

“Borrowing Base Reserve” means, as of any date of
determination, such amounts (expressed as either a specified amount or as a
percentage of a specified category or item) as the Lender may from time to time
establish and adjust in reducing Availability (a) to reflect events,
conditions, contingencies or risks which, as determined by the Lender, do or
may affect (i) the Collateral or its value, (ii) the assets, business or
prospects of the Borrower, or (iii) the security interests and other rights of
the Lender in the Collateral (including the enforceability, perfection and
priority thereof), or (b) to reflect the Lender’s judgment that any collateral
report or financial information furnished by or on behalf of the Borrower to
the Lender is or may have been incomplete, inaccurate or misleading in any
material respect, or (c) in respect of any state of facts that the Lender
determines constitutes a Default or an Event of Default; provided that,
without limiting any other basis for adjusting the Borrowing Base Reserve,  the Borrowing Base Reserve will increase by
$50,000.00 as of December 31, 2004 and will increase by an additional
$50,000.00 as of each calendar month end occurring thereafter, until the Lender
has determined, in its sole discretion, that a sufficient reserve for warranty
risk has been accumulated.

 

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

 

2

 

“Capital Expenditures” means for a given period, any
expenditure of money during such period for the lease, purchase or other
acquisition of any capital asset, or for the lease of any other asset whether
payable currently or in the future.

 

“Cash Flow From Operations” means for a given period,
the sum of (i) Net Income, (ii) depreciation and amortization,
(iii) deferred income tax expense (and minus any deferred income tax
income), (iv) losses incurred by any Foreign Subsidiary (and minus any
income earned by any Foreign Subsidiary) and (v) other non-cash items,
each as determined for such period in accordance with GAAP.

 

“Change of Control” means the occurrence of any of the
following events:

 

(a)           Any Person or “group” (as such term is used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934) is or becomes
the “beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the
Securities Exchange Act of 1934, except that a Person will be deemed to have “beneficial
ownership” of all securities that such Person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time),
directly or indirectly, of more than twenty-five percent (25%) of the voting
power of all classes of Owners of the Borrower.

 

(b)           During any consecutive two-year period, individuals
who at the beginning of such period constituted the board of Directors of the
Borrower (together with any new Directors whose election to such board of
Directors, or whose nomination for election by the Owners of the Borrower, was
approved by a vote of two thirds of the Directors then still in office who were
either Directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the board of Directors of the Borrower then in office.

 

(c)           James W. Grabowski shall cease to actively manage
the Borrower’s day-to-day business activities and a replacement manager
acceptable to the Lender in its sole discretion has not been appointed within
60 days thereafter.

 

“Collateral” means all of the Borrower’s Accounts,
chattel paper and electronic chattel paper, deposit accounts, documents,
Equipment, General Intangibles, goods, instruments, Inventory, Investment
Property, letter-of-credit rights, letters of credit, all sums on deposit in
any Collateral Account, and any items in any Lockbox; together with (i) all
substitutions and replacements for and products of any of the foregoing; (ii)
in the case of all goods, all accessions; (iii) all accessories, attachments,
parts, equipment and repairs now or hereafter attached or affixed to or used in
connection with any goods; (iv) all warehouse receipts, bills of lading and
other documents of title now or hereafter covering such goods; (v) all
collateral subject to the Lien of any Security Document; (vi) any money, or
other assets of the Borrower that now or hereafter come into the possession,
custody, or control of the Lender; (vii) all sums on deposit in the Special
Account; (viii) proceeds of any and all of the foregoing; (ix) books and
records of the Borrower, including all mail or electronic mail addressed to
Borrower; and (x) all of the foregoing, whether now owned or existing or
hereafter acquired or arising or in which the Borrower now has or hereafter
acquires any rights.

 

3

 

“Collateral Account” means the “Lender Account” as
defined in the Lockbox and Collection Account Agreement.

 

“Commitment” means the Lender’s commitment to make
Advances to, and to cause Wells Fargo Bank to issue Letters of Credit for the
account of, the Borrower pursuant to Article II.

 

“Constituent Documents” means with respect to any
Person, as applicable, such Person’s certificate of incorporation, articles of
incorporation, by-laws, certificate of formation, articles of organization,
limited liability company agreement, management agreement, operating agreement,
shareholder agreement, partnership agreement or similar document or agreement
governing such Person’s existence, organization or management or concerning
disposition of ownership interests of such Person or voting rights among such
Person’s owners.

 

“Credit Facility” means the credit facility being made
available to the Borrower by the Lender under Article II.

 

“Current
Maturities of Long Term Debt” means as of a given date, the amount of the
Borrower’s long-term debt and capitalized leases which became due during the
period ending on the designated date.

 

“Cut-off Time” means 11:00 a.m. Minneapolis, Minnesota  time.

 

“Debt” means of a Person as of a given date, all items
of indebtedness or liability which in accordance with GAAP would be included in
determining total liabilities as shown on the liabilities side of a balance
sheet for such Person and shall also include the aggregate payments required to
be made by such Person at any time under any lease that is considered a
capitalized lease under GAAP.

 

“Debt Service Coverage Ratio” means for a given period
(i) the sum of (A) Cash Flow from Operations and (B) Interest Expense minus (C)
unfinanced Capital Expenditures minus (D) dividends or repurchases of
capital stock or stock options or warrants, paid in cash or property (other
than capital stock of Borrower) divided by (ii) the sum of (A) Current
Maturities of Long Term Debt and (B) Interest Expense.

 

“Default” means an event that, with giving of notice
or passage of time or both, would constitute an Event of Default.

 

“Default Period” means any period of time beginning on
the day a Default or Event of Default occurs and ending on the date identified
by the Lender in writing as the date that such Default or Event of Default has
been cured or waived.

 

“Default Rate” means, with respect to a Note, an
annual interest rate in effect during a Default Period or following the
Termination Date, which interest rate shall be equal to three percent (3%) over
the applicable Floating Rate Advance, as such rate may change from time to
time.

 

4

 

“Director” means a director if the Borrower is a
corporation, a governor or manager if the Borrower is a limited liability
company, or a partner if the Borrower is a partnership.

 

“Dollars” and the sign”$” means freely transferable
lawful money of the United States.

 

5

 

“Domestic Subsidiary” means any Subsidiary organized
under the laws of, and the principal place of business of which is (a) located
in the United States or any state or territory thereof or the District of
Columbia, or (b) to the extent the Lender hereafter specifies in writing,  located in Canada or any province or
territory thereof.

 

“ERISA” means the Employee Retirement Income Security
Act of 1974, as amended from time to time.

 

“ERISA Affiliate” means any trade or business (whether
or not incorporated) that is a member of a group which includes the Borrower
and which is treated as a single employer under Section 414 of the IRC.

 

“Earnings Before Taxes” means pretax earnings from
operations, excluding extraordinary gains, but including extraordinary losses
and excluding all earnings (and losses) from any Foreign Subsidiary.

 

“Eligible Accounts” means all unpaid Accounts arising
from the sale or lease of goods or the performance of services, net of any credits,
but excluding any such Accounts having any of the following characteristics:

 

(i)            That
portion of Accounts unpaid 90 days or more after the invoice date or, if the
Lender in its discretion has determined that a particular dated Account may be
eligible, that portion of such Account which is unpaid more than 30 days past
the stated due date or more than 120 days past the invoice date.

 

(ii)           That
portion of Accounts related to goods or services with respect to which the
Borrower has received notice of a claim or dispute, which are subject to a
claim of offset or a contra account, or which reflect a reasonable reserve for
warranty claims or returns;

 

(iii)          That
portion of Accounts not yet earned by the final delivery of goods or rendition
of services, as applicable, by the Borrower to the customer, including progress
billings, and that portion of Accounts for which an invoice has not been sent
to the applicable account debtor;

 

(iv)          Accounts
constituting (i) proceeds of copyrightable material unless such copyrightable
material shall have been registered with the United States Copyright Office, or
(ii) proceeds of patentable inventions unless such patentable inventions have
been registered with the United States Patent and Trademark Office;

 

(v)           Accounts owed
by any unit of government, whether foreign or domestic (provided, however, that
there shall be included in Eligible Accounts that portion of Accounts owed by
such units of government for which the Borrower has provided evidence
satisfactory to the Lender that (A) the Lender has a first priority perfected
security interest and (B) such Accounts may be enforced by the Lender directly
against such unit of government under all applicable laws);

 

6

 

(vi)          Accounts
owed by an account debtor located outside the United States  and Canada which are not (A) backed by a
bank letter of credit naming the Lender as beneficiary or assigned to the
Lender, in the Lender’s possession or control, and with respect to which a control
agreement concerning the letter-of-credit rights is in effect, and acceptable
to the Lender in all respects, in its sole discretion, or (B) covered by a
foreign receivables insurance policy acceptable to the Lender in its sole
discretion; provided that, (X) Accounts owed by account debtors located
in Canada will, to the extent comprising more than 15% of the aggregate balance
of all Accounts, not be Eligible Accounts unless subject to (vi)(A) or (B)
above, (Y) Accounts owed by account debtors located in the Province of Quebec,
Canada will not be Eligible Accounts and (Z) Accounts owed by account debtors
located in Canada which are subject to any agreement or understanding with the
corresponding account debtor that such account will not be assigned, pledged or
otherwise transferred as security or otherwise or that any such transfer is
ineffective, will not be Eligible Accounts;

 

(vii)         Accounts
owed by an account debtor that is insolvent, the subject of bankruptcy
proceedings or has gone out of business;

 

(viii)        Accounts
owed by an Owner, Subsidiary, Affiliate, Officer or employee of the Borrower;

 

(ix)           Accounts
not subject to a duly perfected security interest in the Lender’s favor or
which are subject to any Lien in favor of any Person other than the Lender;

 

(x)            That
portion of Accounts that has been restructured, extended, amended or modified;

 

(xi)           That
portion of Accounts that constitutes advertising, finance charges, service
charges or sales or excise taxes;

 

(xii)          Accounts
owed by an account debtor, regardless of whether otherwise eligible, to the
extent that the aggregate balance of such Accounts exceeds 15% of the aggregate
amount of all Accounts, except that with respect to Accounts owed by Tractor
Supply Company such percentage will be 40%;

 

(xiii)         Accounts
owed by an account debtor, regardless of whether otherwise eligible, if 10% or
more of the total amount of Accounts due from such debtor is ineligible under
clauses (i), (ii), or (x) above; and

 

(xiv)        Accounts,
or portions thereof, otherwise deemed ineligible by the Lender in its sole
discretion.

 

“Eligible Finished Goods Inventory” means all Eligible
Inventory constituting finished goods.

 

7

 

“Eligible Inventory” means all Inventory of the
Borrower, valued at the lower of cost or market in accordance with GAAP; but
excluding any Inventory having any of the following characteristics:

 

(i)            Inventory
that is: in-transit; located at any warehouse, job site or other premises not
approved by the Lender in writing; not subject to a duly perfected first
priority security interest in the Lender’s favor; subject to any lien or
encumbrance that is subordinate to Lender’s first priority security interest;
covered by any negotiable or non-negotiable warehouse receipt, bill of lading
or other document of title; on consignment from any Person; on consignment to
any Person or subject to any bailment unless such consignee or bailee has
executed an agreement with the Lender;

 

(ii)           Supplies,
packaging, labels, nameplates, repair or maintenance parts or sample Inventory,
or customer supplied parts or Inventory;

 

(iii)          Work-in-process
Inventory;

 

(iv)          Inventory
that is damaged, defective, obsolete, slow moving or not currently saleable in
the normal course of the Borrower’s operations, or the amount of such Inventory
that has been reduced by shrinkage;

 

(v)           Inventory
that the Borrower has returned, has attempted to return, is in the process of
returning or intends to return to the vendor thereof;

 

(vi)          Inventory
that is perishable or live;

 

(vii)         Inventory
manufactured by the Borrower pursuant to a license unless the applicable
licensor has agreed in writing to permit the Lender to exercise its rights and
remedies against such Inventory;

 

(viii)        Inventory
that is subject to a Lien in favor of any Person other than the Lender;

 

(ix)           Inventory
stored at locations other than Borrower’s Premises at Ellendale, Plymouth and
Rochester, Minnesota or locations holding less than 10% of the aggregate value
of Borrower’s Inventory;

 

(x)            Inventory
constituting products sold by the Waters Medical Systems Division or the former
Network Division of the Borrower, or used to manufacture such products;

 

(xi)           Inventory
that is held for sale to a specific customer of Borrower; and

 

(xii)          Inventory
otherwise deemed ineligible by the Lender in its sole discretion.

 

8

 

“Eligible Raw Material Inventory” means all Eligible
Inventory constituting raw material or sub-assemblies.

 

“Environmental Law” means any federal, state, local or
other governmental statute, regulation, law or ordinance dealing with the
protection of human health and the environment.

 

“Equipment” means all of the Borrower’s equipment, as
such term is defined in the UCC, whether now owned or hereafter acquired,
including but not limited to all present and future machinery, vehicles,
furniture, fixtures, manufacturing equipment, shop equipment, office and
recordkeeping equipment, parts, tools, supplies, and including specifically the
goods described in any equipment schedule or list herewith or hereafter
furnished to the Lender by the Borrower.

 

“Equipment Term Advance” has the meaning set forth in
Section 2.5.

 

“Equipment Term Note” means the Borrower’s promissory
note, payable to the order of the Lender in substantially the form of Exhibit B
hereto, as the same may be renewed and amended from time to time, and all
replacements thereto.

 

“Equipment Term Note Assumed Maturity Date” has the
meaning set forth in Section 2.6(a).

 

“Event of Default” has the meaning set forth in
Section 7.1.

 

“Financial Covenants” means the covenants set forth in
Section 6.2.

 

“Finished Goods Inventory Advance Rate” means up to
fifty percent (50%), or such lesser rate as the Lender in its sole discretion
may deem appropriate from time to time.

 

“Floating Rate Advance” means (i) with respect to
Revolving Advances evidenced by the Revolving Note, an annual interest rate
equal to the sum of the Prime Rate plus the applicable Margin, and (ii) with
respect to Term Advances evidenced by the Term Notes, an annual interest rate
equal to the sum of the Prime Rate plus the applicable Margin, which interest
rate shall, in each case, change when and as the Prime Rate changes.

 

“Foreign Subsidiary” means any Subsidiary which is not
a Domestic Subsidiary.

 

“Funding Date” has the meaning set forth in Section
2.1.

 

“GAAP” means generally accepted accounting principles,
applied on a basis consistent with the accounting practices applied in the
financial statements described in Section 5.6.

 

“General Intangibles” means all of the Borrower’s
general intangibles, as such term is defined in the UCC, whether now owned or
hereafter acquired, including all present and future Intellectual Property
Rights, customer or supplier lists and contracts, manuals, operating
instructions, permits, franchises, the right to use the Borrower’s name, and
the goodwill of the Borrower’s business.

 

9

 

“Hazardous Substances” means pollutants, contaminants,
hazardous substances, hazardous wastes, petroleum and fractions thereof, and
all other chemicals, wastes, substances and materials listed in, regulated by
or identified in any Environmental Law.

 

“IRC” means the Internal Revenue Code of 1986, as
amended from time to time.

 

“Infringement” or “Infringing” when used with respect
to Intellectual Property Rights means any infringement or other violation of
Intellectual Property Rights.

 

“Intellectual Property Rights” means all actual or
prospective rights arising in connection with any intellectual property or
other proprietary rights, including all rights arising in connection with
copyrights, patents, service marks, trade dress, trade secrets, trademarks,
trade names or mask works.

 

“Interest Expense” means for a given period, the
Borrower’s total gross interest expense during such period (excluding interest
income), and shall in any event include (i) interest expensed (whether or not
paid) on all Debt, (ii) the amortization of debt discounts, (iii) the
amortization of all fees payable in connection with the incurrence of Debt to
the extent included in interest expense, and (iv) the portion of any
capitalized lease obligation allocable to interest expense.

 

“Interest Payment Date” has the meaning set forth in
Section 2.13(a).

 

“Inventory” means all of the Borrower’s inventory, as
such term is defined in the UCC, whether now owned or hereafter acquired,
whether consisting of whole goods, spare or maintenance parts or components,
supplies or materials, whether acquired, held or furnished for sale, for lease
or under service contracts or for manufacture or processing, and wherever
located.  Unless and until there parties
hereafter agree in writing, Inventory will not include inventory owned by any
Subsidiary.

 

“Investment Property” means all of the Borrower’s
investment property, as such term is defined in the UCC, whether now owned or
hereafter acquired, including but not limited to all securities, security
entitlements, securities accounts, commodity contracts, commodity accounts,
stocks, bonds, mutual fund shares, money market shares and U.S. Government
securities.

 

“L/C Amount” means the sum of (i) the aggregate face
amount of any issued and outstanding Letters of Credit and (ii) the unpaid
amount of the Obligation of Reimbursement.

 

“L/C Application” means an application for the
issuance of standby letters of credit pursuant to the terms of a Standby Letter
of Credit Agreement in form acceptable to both Wells Fargo Bank and the Lender.

 

“Letter of Credit” has the meaning set forth in
Section 2.3(a).

 

 “Licensed
Intellectual Property” has the meaning set forth in Section 5.11(c) .

 

10

 

“Lien” means any security interest, mortgage, deed of
trust, pledge, lien, charge, encumbrance, title retention agreement or
analogous instrument or device, including the interest of each lessor under any
capitalized lease and the interest of any bondsman under any payment or
performance bond, in, of or on any assets or properties of a Person, whether
now owned or hereafter acquired and whether arising by agreement or operation
of law.

 

“Life Insurance Assignment” means an Assignment of
Life Insurance Policy as Collateral to be executed by the owner and the
beneficiary thereof, in form and substance satisfactory to the Lender, granting
the Lender a first priority Lien on the Life Insurance Policy and its cash
surrender value and any proceeds therefrom to secure payment of the
Obligations.

 

“Life Insurance Policy” has the meaning set forth in
Section 6.9.

 

“Loan Documents” means this Agreement, the Notes, the
Security Documents and any L/C Application.

 

“Loan Year” has the meaning set forth in Section
2.9(c).

 

“Lockbox” means “Lockbox” as defined in the Lockbox
and Collection Account Agreement.

 

“Lockbox and Collection Account Agreement” means the
Lockbox and Collection Account Agreement by and among the Borrower, Wells Fargo
Bank and the Lender, dated the same date as this Agreement.

 

“Margin” means a rate per annum, expressed as a
percentage, that is determined pursuant to Section 2.9(b).

 

“Material Adverse Effect” means any of the following:

 

(i)            A
material adverse effect on the business, operations, results of operations,
prospects, assets, liabilities or financial condition of the Borrower;

 

(ii)           A material
adverse effect on the ability of the Borrower to perform its obligations under
the Loan Documents;

 

(iii)          A
material adverse effect on the ability of the Lender to enforce the Obligations
or to realize the intended benefits of the Security Documents, including a
material adverse effect on the validity or enforceability of any Loan Document
or of any rights against any Guarantor, or on the status, existence,
perfection, priority (subject to Permitted Liens) or enforceability of any Lien
securing payment or performance of the Obligations; or

 

(iv)          Any claim
against the Borrower or threat of litigation which if determined adversely to
the Borrower would cause the Borrower to be liable to pay an amount exceeding
$250,000.00 or would be an event described in clauses (i), (ii) and (iii)
above.

 

11

 

“Maturity Date” means September 1, 2007.

 

“Maximum Line” means $6,000,000.00 unless said amount
is reduced pursuant to Section 2.13, in which event it means such lower amount.

 

“Minimum Interest Charge” has the meaning given in
Section 2.9(c).

 

“Mortgage” means the Mortgage, Security Agreement and
Fixture Financing Statement with Assignment of Leases and Rents granting the
Lender a first priority mortgage lien on the Mortgaged Real Estate.

 

“Mortgaged Real Estate” means each parcel of real
property described on Exhibit E hereto.

 

“Multiemployer Plan” means a multiemployer plan (as
defined in Section 4001(a)(3) of ERISA) to which the Borrower or any ERISA
Affiliate contributes or is obligated to contribute.

 

“Net Income” means fiscal year-to-date after-tax net
income from continuing operations, including extraordinary losses but excluding
extraordinary gains, all as determined in accordance with GAAP.

 

“Net Loss” means fiscal year-to-date after-tax net
loss from continuing operations as determined in accordance with GAAP, but
excluding all earnings (and losses) from any Foreign Subsidiary.

 

“Note” means the Revolving Note or either of the Term
Notes, and “Notes” means the Revolving Note and both of the Term Notes.

 

“Obligation of Reimbursement” means the obligation of
Borrower to reimburse Wells Fargo Bank or the Lender pursuant to the terms of
the Standby Letter of Credit Agreement and any applicable L/C Application.

 

“Obligations” means each Note, the Obligation of
Reimbursement and each and every other debt, liability and obligation of every
type and description which the Borrower may now or at any time hereafter owe to
the Lender, whether such debt, liability or obligation now exists or is
hereafter created or incurred, whether it arises in a transaction involving the
Lender alone or in a transaction involving other creditors of the Borrower, and
whether it is direct or indirect, due or to become due, absolute or contingent,
primary or secondary, liquidated or unliquidated, or sole, joint, several or
joint and several, and including all indebtedness of the Borrower arising under
any Loan Document between the Borrower and the Lender, whether now in effect or
hereafter entered into and all Wells Fargo Bank Obligations.

 

“Off-the-shelf Software” has the meaning set forth in
Section 5.11(a).

 

12

 

“Officer” means with respect to the Borrower, an
officer if the Borrower is a corporation, a manager if the Borrower is a
limited liability company, or a partner if the Borrower is a partnership.

 

“Overadvance” means or refers to any period of time
during which outstanding Revolving Advances are in excess of then-existing
Borrowing Base Availability.

 

“Owned Intellectual Property” has the meaning set
forth in Section 5.11(a).

 

“Owner” means with respect to the Borrower, each
Person having legal or beneficial title to an ownership interest in the
Borrower or a right to acquire such an interest.

 

“Patent and Trademark Security Agreement” means the
Patent and Trademark Security Agreement by the Borrower in favor of the Lender
dated the same date as this Agreement.

 

“Pension Plan” means a pension plan (as defined in
Section 3(2) of ERISA) maintained for employees of the Borrower or any ERISA
Affiliate and covered by Title IV of ERISA.

 

“Permitted Lien” and “Permitted Liens” have the
meanings set forth in Section 6.3(a).

 

“Person” means any individual, corporation,
partnership, joint venture, limited liability company, association, joint stock
company, trust, unincorporated organization or government or any agency or
political subdivision thereof.

 

“Plan” means an employee benefit plan (as defined in
Section 3(3) of ERISA) maintained for employees of the Borrower or any ERISA
Affiliate.

 

“Premises” means all locations where the Borrower
conducts its business or has any rights of possession, including but not
limited to the locations legally described in Exhibit E attached hereto.

 

“Prime Rate” means at any time the rate of interest
most recently announced by Wells Fargo Bank at its principal office as its
Prime Rate, with the understanding that the Prime Rate is one of Wells Fargo
Bank’s base rates, and serves as the basis upon which effective rates of
interest are calculated for those loans making reference thereto, and is
evidenced by the recording thereof in such internal publication or publications
as Wells Fargo Bank may designate.  Each
change in the rate of interest shall become effective on the date each Prime
Rate change is announced by Wells Fargo Bank.

 

“Raw Material Inventory Advance Rate” means up to
twenty-five percent (25%), or such lesser rate as the Lender in its sole
discretion may deem appropriate from time to time.

 

“Real Estate Term Advance” has the meaning set forth
in Section 2.7.

 

“Real Estate Term Note” means the Borrower’s
promissory note, payable to the order of the Lender in substantially the form
of Exhibit C hereto, as the same may be renewed and amended from time to time,
and all replacements thereto.

 

13

 

“Real Estate Term Note Assumed Maturity Date” has the
meaning set forth in Section 2.8(a).

 

“Reportable Event” means a reportable event (as
defined in Section 4043 of ERISA), other than an event for which the 30-day
notice requirement under ERISA has been waived in regulations issued by the
Pension Benefit Guaranty Corporation.

 

“Revolving Advance” has the meaning set forth in
Section 2.1.

 

“Revolving Note” means the Borrower’s revolving
promissory note, payable to the order of the Lender in substantially the form
of Exhibit A hereto, as same may be renewed and amended from time to time, and
all replacements thereto.

 

“Rutland” means No 549 Leicester Limited, a private
company limited by shares incorporated in England.

 

“Rutland Acquisition” means the acquisition by Zareba
Europe of all of the issued share capital of Rutland.

 

“Rutland Agreement” means the stock purchase agreement
among Zareba Europe, and Leslie Dickinson and Barbara Helen Todd, individuals,
as furnished to Lender by Borrower, pursuant to which the Rutland Acquisition
is effected.

 

“Security Documents” means this Agreement, the Lockbox
and Collection Account Agreement, the Mortgage, the Life Insurance Assignment
and the Patent and Trademark Security Agreement, and any other document
delivered to the Lender from time to time to secure the Obligations.

 

“Security Interest” has the meaning set forth in
Section 3.1.

 

“Special Account” means a specified cash collateral
account maintained by a financial institution acceptable to the Lender in
connection with Letters of Credit, as contemplated by Section 2.4.

 

“Standby Letter of Credit Agreement” means an
agreement governing the issuance of standby letters of credit by Wells Fargo
Bank entered into between the Borrower and Lender as co-applicants and Wells
Fargo Bank as issuer.

 

“Subsidiary” means any corporation of which more than
50% of the outstanding shares of capital stock having general voting power
under ordinary circumstances to elect a majority of the board of Directors of
such corporation, irrespective of whether or not at the time stock of any other
class or classes shall have or might have voting power by reason of the
happening of any contingency, is at the time directly or indirectly owned by
the Borrower, by the Borrower and one or more other Subsidiaries, or by one or
more other Subsidiaries.

 

“Term Advances” means the Equipment Term Advance and
the Real Estate Term Advance.

 

14

 

“Term Notes” means the Equipment Term Note and the
Real Estate Term Note.

 

“Termination Date” means the earliest of (i) the
Maturity Date, (ii) the date the Borrower terminates the Credit Facility, or
(iii) the date the Lender demands payment of the Obligations after an Event of
Default pursuant to Section 7.2.

 

“UCC” means the Uniform Commercial Code as in effect
in the state designated in Section 8.13 as the state whose laws shall govern
this Agreement, or in any other state whose laws are held to govern this
Agreement or any portion hereof.

 

“Unused Amount” has the meaning set forth in Section
2.10(a).

 

“Wells Fargo Bank Obligations” means all obligations,
liabilities, contingent reimbursement obligations, fees, and expenses owing by the
Borrower or its Subsidiaries to Wells Fargo Bank with respect to Wells Fargo
Bank Products, whether for the payment of money, whether direct or indirect,
absolute or contingent, due or to become due, now existing or hereafter
arising, whether or not Borrower is obligated to reimburse said amounts to the
Lender as a result of the Lender purchasing participations from or agreeing to
indemnify or reimburse Wells Fargo Bank for any loss or indebtedness arising
with respect to Wells Fargo Bank Products provided to the Borrower or its
Subsidiaries.

 

“Wells Fargo Bank Obligations Reserve” means, as of
any date of determination, the dollar amount that the Lender then determines is
a reasonable determination of the credit exposure with respect to Wells Fargo
Bank Obligations and which is available for payment of Wells Fargo Bank
Obligations.

 

“Wells Fargo Bank Products” means any service or
facility extended to the Borrower or its Subsidiaries by Wells Fargo Bank
including but not limited to: (a) credit cards, (b) credit card processing
services, (c) debit cards, (d) purchase cards, (e) cash management or related
services including the Automated Clearing House processing of electronic funds
transfers, (f) controlled disbursement accounts or services, and (g) any agreement
which provides for an interest rate, credit, commodity or equity swap, cap,
floor, collar, forward foreign exchange transaction, currency swap, cross
currency rate swap, currency option, or any combination of, or option with
respect to, these or similar transactions, for the purpose of hedging the
Borrower’s or its Subsidiaries’ exposure to fluctuations in interest or
exchange rates, loan, credit exchange, security or currency valuations or
commodity prices.

 

“Wells Fargo Bank” means Wells Fargo Bank, National
Association.

 

“Zareba Europe” means Zareba Systems Europe Limited, a
United Kingdom private limited company.

 

Section 1.2             Other
Definitional Terms; Rules of Interpretation.  The words “hereof”, “herein” and “hereunder”
and words of similar import when used in this Agreement shall refer to this
Agreement as a whole and not to any particular provision of this
Agreement.  All accounting terms not
otherwise defined herein have the meanings assigned to them in accordance with
GAAP.  All terms defined in the UCC and
not otherwise defined herein have the meanings assigned to them in the
UCC.  References to Articles, Sections,
subsections, Exhibits, Schedules 

 

15

 

and the like, are to Articles,
Sections and subsections of, or Exhibits or Schedules attached to, this
Agreement unless otherwise expressly provided. 
The words “include”, “includes” and “including” shall be deemed to be
followed by the phrase “without limitation”. 
Unless the context in which used herein otherwise clearly requires, “or”
has the inclusive meaning represented by the phrase “and/or”.  Defined terms include in the singular number
the plural and in the plural number the singular.  Reference to any agreement (including the
Loan Documents), document or instrument means such agreement, document or
instrument as amended or modified and in effect from time to time in accordance
with the terms thereof (and, if applicable, in accordance with the terms hereof
and the other Loan Documents), except where otherwise explicitly provided, and
reference to any promissory note includes any promissory note which is an
extension or renewal thereof or a substitute or replacement therefor.  Reference to any law, rule, regulation,
order, decree, requirement, policy, guideline, directive or interpretation
means as amended, modified, codified, replaced or reenacted, in whole or in
part, and in effect on the determination date, including rules and regulations
promulgated thereunder.

 

ARTICLE II

 

AMOUNT AND TERMS OF THE
CREDIT FACILITY

 

Section 2.1             Revolving
Advances.  The Lender agrees, subject
to the terms and conditions of this Agreement, to make advances (“Revolving
Advances”) to the Borrower from time to time from the date that all of the
conditions set forth in 4.1 are satisfied (the “Funding Date”) to and until the
Termination Date.  The Lender shall have
no obligation to make a Revolving Advance to the extent that the amount of the
requested Revolving Advance exceeds Availability.  The Borrower’s obligation to pay the
Revolving Advances shall be evidenced by the Revolving Note and shall be
secured by the Collateral, and to the extent provided therein, the Real Estate
Mortgage.  Within the limits set forth in
this Section 2.1, the Borrower may borrow, prepay pursuant to Section 2.13, and
reborrow.

 

Section 2.2             Procedures
for Requesting Advances.  The
Borrower shall comply with the following procedures in requesting Revolving
Advances:

 

(a)           Time
for Requests.  The Borrower shall request each Advance not later than the Cut-off Time
on the Business Day on which the Advance is to be made.  Each request that conforms to the terms of
this Agreement shall be effective upon receipt by the Lender, shall be by
telephone and shall be confirmed in writing (in the form of a Notice of
Borrowing as set forth in Exhibit F hereto) by the Borrower if so requested by
the Lender, by (i) an Officer of the Borrower; or (ii) a person designated as
the Borrower’s agent by an Officer of the Borrower in a writing delivered to
the Lender; or (iii) a person whom the Lender reasonably believes to be an
Officer of the Borrower or such a designated agent.  The Borrower shall repay all Advances even if
the Lender does not receive such confirmation and even if the person requesting
an Advance was not in fact authorized to do so. 
Any request for an Advance, whether written or telephonic, shall be
deemed to be a representation by the Borrower that the conditions set forth in
Section 4.2 have been satisfied as of the time of the request.

 

16

 

(b)           Disbursement.  Upon
fulfillment of the applicable conditions set forth in Article IV, the
Lender shall disburse the proceeds of the requested Advance by crediting the
same to the Borrower’s demand deposit account maintained with Wells Fargo Bank
unless the Lender and the Borrower shall agree in writing to another manner of
disbursement.

 

Section 2.3             Letters
of Credit.

 

(a)           The Lender agrees, subject to the terms and
conditions of this Agreement, to cause Wells Fargo Bank to issue, at any time
after the Funding Date and prior to the Termination Date, one or more
irrevocable standby letters of credit (each, a “Letter of Credit”) for the
Borrower’s account by acting as Borrower’s co-applicant to Wells Fargo Bank as
issuer.  From and after the Funding Date,
Letters of Credit will also include the letters of credit listed on Schedule
2.3 previously issued by Wells Fargo Bank. 
The Lender shall have no obligation to cause Wells Fargo Bank to issue
any Letter of Credit if the face amount of the Letter of Credit to be issued
would exceed the lesser of:

 

(i)            $500,000.00
less the L/C Amount, or

 

(ii)           Availability.

 

Each Letter of Credit, if any, shall be issued
pursuant to a separate L/C Application made by the Borrower and the Lender as
co-applicants to Wells Fargo Bank, which must be completed in a manner
satisfactory to the Lender and Wells Fargo Bank.  The terms and conditions set forth in each
such L/C Application shall supplement the terms and conditions of the Standby
Letter of Credit Agreement.

 

(b)           No Letter of Credit shall be issued with an expiry
date later than the earlier of (i) the Termination Date in effect as of
the date of issuance; or (ii) 365 days from the date of issuance.

 

(c)           Any request for issuance of a Letter of Credit shall
be deemed to be a representation by the Borrower that the conditions set forth
in Section 4.2 have been satisfied as of the date of the request.

 

(d)           If a draft is submitted under a Letter of Credit
when the Borrower is unable, because a Default Period exists or for any other
reason, to obtain a Revolving Advance to pay the Obligation of Reimbursement,
the Borrower shall pay to the Lender on demand and in immediately available
funds, the amount of the Obligation of Reimbursement together with interest,
accrued from the date of the draft until payment in full at the Default
Rate.  Notwithstanding the Borrower’s
inability to obtain a Revolving Advance for any reason, the Lender is
irrevocably authorized, in its sole discretion, to make a Revolving Advance in
an amount sufficient to discharge the Obligation of Reimbursement and all
accrued but unpaid interest thereon.

 

17

 

Section 2.4             Special
Account.  If the Credit Facility is
terminated for any reason while any Letter of Credit is outstanding, the
Borrower shall thereupon pay the Lender in immediately available funds for
deposit in the Special Account an amount equal to the L/C Amount plus any
anticipated fees and costs.  If Borrower
fails to promptly make any such payment in the amount required hereunder, then
Lender may make a Revolving Advance against the Credit Facility in an amount
sufficient to fulfill this obligation and deposit the proceeds to the Special
Account.  The Special Account shall be an
interest bearing account maintained for the Lender by any financial institution
acceptable to the Lender.  Any interest
earned on amounts deposited in the Special Account shall be credited to the
Special Account.  The Lender may apply
amounts on deposit in the Special Account at any time or from time to time to
the Obligations in the Lender’s sole discretion.  The Borrower may not withdraw any amounts on
deposit in the Special Account as long as the Lender maintains a security
interest therein.  The Lender agrees to
transfer any balance in the Special Account to the Borrower when the Lender is
required to release its security interest in the Special Account under
applicable law.

 

Section 2.5             Equipment
Term Advance.

 

(a)           The Lender agrees, subject to the terms and
conditions of this Agreement, to make a single advance to the Borrower on the
Funding Date (the “Equipment Term Advance”) in an amount not exceeding the
lesser of:  (i) $500,000.00 or (ii) 100%
of the net forced sale liquidation value of Equipment designated by the Lender
as eligible to support the Equipment Term Advance.  The value described in (ii) above will be as
determined by an independent  appraiser,
obtained and reviewed in accordance with Lender’s standards. The Borrower’s
obligation to pay the Equipment Term Advance shall be evidenced by the
Equipment Term Note and shall be secured by the Collateral as provided in
Article III, and to the extent provided therein, the Real Estate Mortgage.

 

(b)           Upon fulfillment of the applicable conditions set
forth in Article IV, the Borrower shall be deemed to have requested the entire
available Equipment Term Advance and the Lender shall deposit the proceeds of
the requested Equipment Term Advance by crediting the same to the Borrower’s
demand deposit account specified in Section 2.2(b) unless the Lender and the
Borrower shall agree in writing to another manner of disbursement.  Borrower shall be thereupon deemed to be a
representation by the Borrower, upon which the Lender may rely, that the Borrower
is in compliance with the conditions set forth in Section 4.2 as of the time of
the deemed request.

 

Section 2.6             Payment
of Equipment Term Note.  The
outstanding principal balance of the Equipment Term Note shall be due and
payable as follows:

 

(a)           Beginning on September 30, 2004, and on the
last day of each month thereafter, in substantially equal monthly installments
equal to the greater of $8,334.00 or an amount sufficient to fully amortize the
principal balance of the Equipment Term Note over an assumed term ending on
August 31, 2009 (the “Equipment Term Note Assumed Maturity Date”).

 

18

 

(b)           If the Lender at any time obtains an appraisal of
the Equipment designated by the Lender, in its sole discretion, as eligible to
support the Equipment Term Advance as permitted under Section 6.10(d) herein,
and the appraisal shows the aggregate outstanding principal balance of the
Equipment Term Note to exceed the lesser of: 
(i) 100% of the net forced sale liquidation value of such Equipment, and
(ii) 80% of the orderly sale liquidation value of such Equipment, then the
Borrower, upon demand by the Lender, shall immediately prepay the Equipment
Term Note in the amount of such excess, together with any prepayment fee owed
pursuant to Section 2.10(f).

 

(c)           All prepayments of principal with respect to the
Equipment Term Note shall be applied to the most remote principal installment
or installments then unpaid.

 

(d)           The entire unpaid principal balance of the Equipment
Term Note, and all unpaid interest accrued thereon, shall in any event be due
and payable on the earlier of the Termination Date, or the Maturity Date.

 

Section 2.7             Real
Estate Term Advance.

 

(a)           The Lender agrees, subject to the terms and
conditions of this Agreement, to make a single advance to the Borrower on the
Funding Date (the “Real Estate Term Advance”) in an amount not exceeding the
lesser of: (i) $1,300,000.00; or (ii) 75% of the fair market value as vacant of
the Mortgaged Real Estate as determined by an independent appraiser, obtained
and reviewed in accordance with the Lender’s standards.  The Borrower’s obligation to pay the Real
Estate Term Advance shall be evidenced by the Real Estate Term Note and shall
be secured by the Collateral as provided in Article III and the Mortgaged Real
Estate.

 

(b)           Upon fulfillment of the applicable conditions set
forth in Article IV, the Borrower shall be deemed to have requested the entire
available Real Estate Term Advance and the Lender shall deposit the proceeds of
the requested Real Estate Term Advance by crediting the same to the Borrower’s
demand deposit account specified in Section 2.2(b) unless the Lender and the
Borrower shall agree in writing to another manner of disbursement.  Borrower shall be thereupon deemed to be a
representation by the Borrower, upon which the Lender may rely, that the
Borrower is in compliance with the conditions set forth in Section 4.2 as of
the time of the deemed request.

 

Section 2.8             Payment
of Real Estate Term Note.  The outstanding
principal balance of the Term Note shall be due and payable as follows:

 

(a)           Beginning on September 30, 2004 and on the last
day of each month thereafter, in substantially equal monthly installments equal
to the greater of $10,834.00 or an amount sufficient to fully amortize the
principal balance of the Real Estate Term Note over an assumed term ending on
August 31, 2014 (the “Real Estate Term Note Assumed Maturity Date”).

 

(b)           If the Lender at any time obtains an appraisal of
the Mortgaged Real Estate as permitted under Section 6.10(d) herein, and the
appraisal shows the aggregate outstanding principal balance of the Real Estate
Term Note to exceed 75% of the fair market value as vacant of the Mortgaged
Real Estate, then the Borrower, upon demand by the Lender, shall immediately 

 

19

 

prepay the Real Estate Term
Note in the amount of such excess, together with any prepayment fee owed
pursuant to Section 2.10(f).

 

(c)           All prepayments of principal with respect to the
Real Estate Term Note shall be applied to the most remote principal installment
or installments then unpaid.

 

(d)           The entire unpaid principal balance of the Real Estate Term Note, and
all unpaid interest accrued thereon, shall in any event be due and payable on
the earlier of the Termination Date or the Maturity Date.

 

Section 2.9             Interest;
Margin; Minimum Interest Charge; Default Interest; Clearance Days;
Participations; Usury.

 

(a)           Interest.  Except as
provided in Section 2.9(d) and Section 2.9 (g), the principal amount of
each Advance shall bear interest as a Floating Rate Advance.

 

(b)           Margins.  The Margins
through and including the first adjustment occurring as specified below shall
be one-half of one percent (.50%) for Term Advances that are Floating Rate
Advances and one-half of one percent (.50%) for Revolving Advances that are
Floating Rate Advances.  The Margins
shall be adjusted with respect to the fiscal quarters of the Borrower ending
June 30 and December 31 on the basis of the Debt Service Coverage Ratio of the
Borrower with respect to the two (2) consecutive fiscal quarters ending as of
the end of each such fiscal quarter, in accordance with the following table:

 

	
   

  	
   

  	
  Margins

  	
   

  
	
   

  	
   

  	
  Floating Rate Advances

  	
   

  
	
  Debt Service Coverage Ratio

  	
   

  	
  Revolving Advances

  	
   

  	
  Term Advances

  	
   

  
	
  (i)

  	
  Debt Service Coverage Ratio is determined by the Lender to be greater
  than 1.20.

  	
   

  	
  zero percent (0%)

  	
   

  	
  zero percent (0%)

  	
   

  
	
  (ii)

  	
  Debt Service Coverage Ratio is determined by the Lender to be greater
  than 1.10 and less than or equal to 1.20.

  	
   

  	
  one-quarter of one percent (.25%)

  	
   

  	
  one-quarter of one percent (.25%)

  	
   

  
	
  (iii)

  	
  Debt Service Coverage Ratio is determined by the Lender to be less
  than or equal to 1.10.

  	
   

  	
  one-half of one percent (.50%)

  	
   

  	
  one-half of one percent (.50%)

  	
   

  

 

Reductions and increases in the Margins will be made
effective as of each August 1 and February 1 immediately following receipt of
the Borrower’s financial statements and compliance certificates required under
Section 6.1(b) with respect to each fiscal quarter of the Borrower ending June
30 and December 31.  Any Margin change
described above shall become effective as the dates specified above, as the
Lender in its sole discretion deems appropriate.  

 

20

 

Notwithstanding the foregoing,
if the Borrower fails to deliver any financial statements or compliance
certificates required under Section 6.1(b), the Lender may, by notice to the
Borrower, increase the Margins to the highest rate set forth above.

 

If amended or restated financial statements change
previously calculated Margins, the Lender may, as the Lender in its sole
discretion deems appropriate, reduce or increase the Margins retroactively
effective from the date when the Margin was originally adjusted with respect to
the financial statements that were so amended or restated.  Appropriate adjustment to the amount of
interest accrued by reason of any such retroactive effectiveness will be
promptly determined and paid by the appropriate party.

 

(c)           Minimum
Interest Charge.  Notwithstanding the interest payable pursuant
to Subsection (a), the Borrower shall pay to the Lender interest of not less
than $125,000.00 per each of the first and second Loan Year and $100,000.00 per
each Loan Year occurring after the end of second Loan Year and before the
Termination Date (the “Minimum Interest Charge”) during the term of this
Agreement, and the Borrower shall pay any deficiency between the Minimum
Interest Charge and the amount of interest otherwise calculated under Section
2.9(a) following each anniversary of the Funding Date and on the Termination
Date.  When calculating the deficiency
due hereunder, if any, between the Minimum Interest Charge and the amount of
interest otherwise payable under Section 2.9(a), the Default Rate, if
applicable, shall be disregarded.  As
used in this subsection (c), “Loan Year” means each one-year period ending on
an anniversary of the Funding Date and any period beginning immediately after
the end of the most recently ended Loan Year actually one year in length and
ending on the Termination Date, even if shorter than one year.

 

(d)           Default Interest
Rate.  At
any time during any Default Period or following the Termination Date, in the
Lender’s sole discretion and without waiving any of its other rights or
remedies, the principal of the Notes shall bear interest at the Default Rate or
such lesser rate as the Lender may determine, effective as of the first day of
the month in which any Default Period begins through the last day of such
Default Period, or any shorter time period that the Lender may determine.  The decision of the Lender to impose a rate
that is less than the Default Rate or to not impose the Default Rate for the
entire duration of the Default Period shall be made by Lender in its sole
discretion and shall not be a waiver of any of its other rights and remedies,
including its right to retroactively impose the full Default Rate for the
entirety of any such Default Period or following the Termination Date.

 

(e)           Clearance
Days.  Interest
at the interest rate applicable under this Section 2.9 shall accrue on the
amount of each payment received by Lender (even if delivered in the form of
immediately available funds), commencing on the calendar day following receipt
of the payment and continuing through the end of the first Business Day
following receipt of the payment.

 

(f)            Participations.  If any
Person shall acquire a participation in the Advances or the Obligation of
Reimbursement, the Borrower shall be obligated to the Lender to pay the full
amount of all interest calculated under this Section 2.9, along with all other
fees, charges and other amounts due under this Agreement, regardless if such
Person elects to accept interest with respect to its participation at a lower
rate than that calculated under this Section 2.9, or otherwise

 

21

elects to accept less than
its prorata share of such fees, charges and other amounts due under this
Agreement. 

 

(g)           Usury.  In any event
no rate change shall be put into effect which would result in a rate greater
than the highest rate permitted by law.  Notwithstanding
anything to the contrary contained in any Loan Document, all agreements which
either now are or which shall become agreements between the Borrower and the
Lender are hereby limited so that in no contingency or event whatsoever shall
the total liability for payments in the nature of interest, additional interest
and other charges exceed the applicable limits imposed by any applicable usury
laws.  If any payments in the nature of
interest, additional interest and other charges made under any Loan Document
are held to be in excess of the limits imposed by any applicable usury laws, it
is agreed that any such amount held to be in excess shall be considered payment
of principal hereunder, and the indebtedness evidenced hereby shall be reduced
by such amount so that the total liability for payments in the nature of
interest, additional interest and other charges shall not exceed the applicable
limits imposed by any applicable usury laws, in compliance with the desires of
the Borrower and the Lender.  This
provision shall never be superseded or waived and shall control every other
provision of the Loan Documents and all agreements between the Borrower and the
Lender, or their successors and assigns.

 

Section 2.10           Fees.

 

(a)           Unused Line Fee.  For the purposes
of this Section 2.10, “Unused Amount” means the Maximum Line reduced by
outstanding Revolving Advances and the L/C Amount.  The Borrower agrees to pay to the Lender an
unused line fee at the rate of one-quarter of one percent (.25%) per annum on
the average daily Unused Amount from the date of this Agreement to and
including the Termination Date, due and payable monthly in arrears on the first
day of the month and on the Termination Date.

 

(b)           Collateral
Exam Fees.  The Borrower shall pay the Lender 
fees in connection with any collateral exams, audits or inspections
conducted by or on behalf of the Lender of any Collateral or the Borrower’s
operations or business, whether conducted before or after the date of this
Agreement at the rates established from time to time by the Lender as its
collateral exam fees (which fees are currently Eight Hundred and 00/100 Dollars
($800.00) per day per collateral examiner), together with all actual
out-of-pocket costs and expenses incurred in conducting any such collateral
examination or inspection.

 

(c)           Letter
of Credit Fees.  The Borrower shall pay to the Lender a fee with respect to each Letter
of Credit, if any, accruing on a daily basis and computed at an annual rate of
two percent (2.0%) of the aggregate amount that may then be drawn, assuming
compliance with all conditions for drawing (the “Aggregate Face Amount”), from
and including the date of issuance of such Letter of Credit until such date as
such Letter of Credit shall terminate by its terms or be returned to the
Lender, due and payable monthly in arrears on the first day of each month and
on the Termination Date; provided, however, that during Default Periods, in the
Lender’s sole discretion and without waiving any of its other rights and
remedies, such fee shall increase to five percent (5.0%) of the Aggregate Face
Amount.  The foregoing fee shall be in
addition to any and all fees, commissions and charges of Wells Fargo Bank with
respect to or in connection with such Letter of Credit.

 

22

 

(d)           Letter of Credit
Administrative Fees.  The Borrower shall pay to the Lender all
administrative fees charged by Wells Fargo Bank in connection with the honoring
of drafts under any Letter of Credit, amendments thereto, transfers thereof and
all other activity with respect to the Letters of Credit at the then — current
rates published by Wells Fargo Bank for such services rendered on behalf of
customers of Wells Fargo Bank generally.

 

(e)           Termination
and Line Reduction Fees.  If the Credit Facility is terminated (i) by the
Lender during a Default Period that begins before a Maturity Date, (ii) by the
Borrower (A) as of a date other than a Maturity Date or (B) as of a Maturity
Date but without the Lender having received written notice of such termination
at least 90 days before such Maturity Date, or if the Borrower reduces the
Maximum Line, the Borrower shall pay to the Lender a fee in an amount equal to
a percentage of the Maximum Line (or the reduction of the Maximum Line, as the
case may be) as follows:  (A) three
percent (3%) if the termination or reduction occurs on or before the first
anniversary of the Funding Date; (B) two percent (2%) if the termination or
reduction occurs after the first anniversary of the Funding Date but on or
before the second anniversary of the Funding Date; and (C) one percent (1%) if
the termination or reduction occurs after the second anniversary of the Funding
Date and before the Maturity Date.

 

(f)            Prepayment Fees.  Borrower may
prepay the principal amount of any Revolving Note Floating Rate Advance at any
time in any amount without penalty.

 

If a Term Note is prepaid for any reason, the Borrower
shall pay to the Lender a fee in an amount equal to a percentage of the
principal prepaid as follows:  (i) three
percent (3%) if prepayment occurs on or before the first anniversary of the
Funding Date; (ii) two percent (2%) if prepayment occurs after the first
anniversary of the Funding Date but on or before the second anniversary of the
Funding Date; and (iii) one percent (1%) if prepayment occurs after the second
anniversary of the Funding Date.

 

(g)           Waiver of Termination
and Prepayment Fees.  The Borrower, at Lender’s discretion, will be
excused from the payment of termination and prepayment fees otherwise due under
Section 2.10(e) and Section 2.10(f) if such termination or prepayment is made
because of refinancing through Wells Fargo Bank.

 

(h)           Overadvance
Fees.  The
Borrower shall pay a fee for each Overadvance in the minimum amount of $1,000.00
for each day or portion thereof that Revolving Advances exceed the Borrowing
Base, regardless of how the Overadvance arises or whether or not the
Overadvance has been agreed to in advance by Lender; provided, however, that
payment of any such Overadvance fee shall not be deemed to constitute either
consent to the Overadvance or the waiver of any Event of Default arising as the
result of an Overadvance not otherwise consented to in advance by Lender.

 

23

 

(i)            Other Fees and
Charges; Payment of Fees.  The Lender may from time to time impose additional
fees and charges as consideration for Advances made in excess of Availability
or for other events that constitute an Event of Default or a Default hereunder,
including fees and charges for the administration of Collateral by the Lender,
and fees and charges for the late delivery of reports, which may be assessed in
the Lender’s sole discretion on either an hourly, periodic, or flat fee basis,
and in lieu of or in addition to imposing interest at the Default Rate.

 

Borrower authorizes Lender to collect all such fees
and charges due hereunder by charging Borrower’s deposit account, account
number 16563 maintained with Wells Fargo Bank, or any other deposit account maintained
by Borrower with Wells Fargo Bank, for the full amount thereof.  Should there be insufficient funds in any
such deposit account to pay all such sums when due, the full amount of such
deficiency shall be immediately due and payable by Borrower.

 

Section 2.11           Time for Interest
Payments; Payment on Non-Business Days; Computation of Interest and Fees.

 

(a)           Time
For Interest Payments.  Accrued and unpaid interest shall be due and payable
on the first day of each month and on the Termination Date (each an “Interest
Payment Date”), or if any such day is not a Business Day, on the next
succeeding Business Day. Interest will accrue from the most recent date to
which interest has been paid or, if no interest has been paid, from the date of
advance to the Interest Payment Date.  If
an Interest Payment Date is not a Business Day, payment shall be made on the
next succeeding Business Day.

 

(b)           Payment on Non Business
Days.  Whenever
any payment to be made hereunder shall be stated to be due on a day which is
not a Business Day, such payment may be made on the next succeeding Business
Day, and such extension of time shall in such case be included in the
computation of interest on the Advances or the fees hereunder, as the case may
be.

 

(c)           Computation of Interest
and Fees. 
Interest accruing on the outstanding principal balance of the Advances
and fees hereunder outstanding from time to time shall be computed on the basis
of actual number of days elapsed in a year of 360 days.

 

Section 2.12           Lockbox and
Collateral Account; Application of Payments.

 

(a)           Lockbox and Collateral
Account.

 

(i)            The
Borrower shall instruct all account debtors to pay all Accounts directly to the
Lockbox.  If, notwithstanding such
instructions, the Borrower receives any payments on Accounts, the Borrower
shall deposit such payments into the Collateral Account.  The Borrower shall also deposit all other
cash proceeds of Collateral regardless of source or nature directly into the
Collateral Account.  Until so deposited,
the Borrower shall hold all such payments and cash proceeds in trust for and as
the property of the Lender and shall not commingle such property with any of
its other funds or property.  All
deposits in the Collateral Account shall constitute proceeds of Collateral and
shall not constitute payment of the Obligations.

 

24

 

(ii)           All items
deposited in the Collateral Account shall be subject to final payment.  If any such item is returned uncollected, the
Borrower will immediately pay the Lender, or, for items deposited in the
Collateral Account, the bank maintaining such account, the amount of that item,
or such bank at its discretion may charge any uncollected item to the Borrower’s
commercial account or other account.  The
Borrower shall be liable as an endorser on all items deposited in the
Collateral Account, whether or not in fact endorsed by the Borrower.

 

(b)           Application
of Payments.  The Lender shall from time to time, in accordance with the Lockbox and
Collection Account Agreement, cause funds in the Collateral Account to be
transferred to the Lender’s general account for payment of the
Obligations.  Amounts deposited in the
Collateral Account shall not be subject to withdrawal by the Borrower, except
after payment in full and discharge of all Obligations.

 

Section 2.13           Voluntary
Prepayment; Reduction of the Maximum Line; Termination of the
Credit Facility by the Borrower. 
Except as otherwise provided herein, the Borrower may prepay the
Advances in whole at any time or from time to time in part.  The Borrower may terminate the Credit
Facility or reduce the Maximum Line at any time if it (i) gives the Lender at
least 30 days prior written notice and (ii) pays the Lender termination,
prepayment and Maximum Line reduction fees in accordance with Section 2.10(e)
and Section 2.10(f).  Any reduction in
the Maximum Line shall be in multiples of $100,000.00, and with a minimum
reduction of at least $500,000.00.  If
the Borrower reduces the Maximum Line to zero, all Obligations shall be immediately
due and payable, and if Borrower gives Lender less than the required 30 days
notice, Borrower shall be liable for payment of additional interest for each
day that the notice was short of the required 30 day notice, which interest
shall be the greater of the Minimum Interest Charge or Unused Line Fee
calculated based on Borrower’s average borrowings under the Credit Facility for
the six months prior to the date that Borrower gives notice of its intent to
terminate the Credit Facility or reduce the Maximum Line.  Subject to termination of the Credit Facility
and payment and performance of all Obligations, the Lender shall, at Borrower’s
expense and within the time periods required under applicable law, release or
terminate any filings or other agreements that perfect the Security Interest.

 

Section 2.14           Mandatory
Prepayment.  Without notice or
demand, if the sum of the outstanding principal balance of the Revolving
Advances plus the L/C Amount shall at any time exceed the Borrowing Base, the
Borrower shall (i) first, immediately prepay the Revolving Advances to the
extent necessary to eliminate such excess; and (ii) if prepayment in full of
the Revolving Advances is insufficient to eliminate such excess, pay to the
Lender in immediately available funds for deposit in the Special Account an
amount equal to the remaining excess. 
Any payment received by the Lender under this Section 2.14 or under
Section 2.13 may be applied to the Obligations, in such order and in such
amounts as the Lender in its sole discretion may determine from time to time.

 

25

 

Section 2.15           Revolving Advances
to Pay Obligations. 
Notwithstanding the terms of Section 2.1, the Lender may, in its
discretion at any time or from time to time, without the Borrower’s request and
even if the conditions set forth in Section 4.2 would not be satisfied, make a
Revolving Advance in an amount equal to the portion of the Obligations from
time to time due and payable, and may deliver the proceeds of any such
Revolving Advance to Wells Fargo Bank to pay any unpaid Wells Fargo Bank
Obligations.

 

Section 2.16           Use
of Proceeds.  The Borrower
shall use the proceeds of Advances and each Letter of Credit (a) to loan £.9
million to Zareba Europe pursuant to a certain Intercompany Credit Agreement in
form and substance satisfactory to the Lender and to purchase £1.95 million of
capital stock of Zareba Europe (the aggregate U.S. dollar value of such
loan and purchase shall not exceed 
$5,130,000.00 at the applicable exchange rate on the date the Advances
to be used for such purposes are made) to enable Zareba Europe to consummate
the Rutland Acquisition; (b) to pay all obligations owing under the
Borrower’s existing credit facility with Wells Fargo Bank; and (c) for ordinary
working capital purposes.

 

Section 2.17           Liability
Records.  The Lender may
maintain from time to time, at its discretion, records as to the
Obligations.  All entries made on any
such record shall be presumed correct until the Borrower establishes the
contrary.  Upon the Lender’s demand, the
Borrower will admit and certify in writing the exact principal balance of the
Obligations that the Borrower then asserts to be outstanding.  Any billing statement or accounting rendered
by the Lender shall be conclusive and fully binding on the Borrower unless the
Borrower gives the Lender specific written notice of exception within 30 days
after receipt.

 

ARTICLE III

 

SECURITY INTEREST;
OCCUPANCY; SETOFF

 

Section 3.1             Grant
of Security Interest. 
The Borrower hereby pledges, assigns and grants to the Lender, for the
benefit of itself and Wells Fargo Bank with respect to Wells Fargo Bank
Obligations, a lien and security interest (collectively referred to as the “Security
Interest”) in the Collateral, as security for the payment and performance of
the Obligations. Upon request by the Lender, the Borrower will grant the
Lender, for the benefit of itself and Wells Fargo Bank, with respect to any
Wells Fargo Bank Obligations, a security interest in all commercial tort claims
it may have against any Person.

 

Section 3.2             Notification of
Account Debtors and Other Obligors.  The Lender may at any time (whether or not a
Default Period then exists) notify any account debtor or other person obligated
to pay the amount due that such right to payment has been assigned or
transferred to the Lender for security and shall be paid directly to the
Lender.  The Borrower will join in giving
such notice if the Lender so requests. 
At any time after the Borrower or the Lender gives such notice to an
account debtor or other obligor, the Lender may, but need not, in the Lender’s
name or in the Borrower’s name, (a) demand, sue for, collect or receive any
money or property at any time payable or receivable on account of, or securing,
any such right to payment, or grant any extension to, make any compromise or
settlement with or otherwise agree to waive, modify,

 

26

 

amend or change the obligations (including collateral
obligations) of any such account debtor or other obligor.  The Lender may, in the Lender’s name or in
the Borrower’s name, as the Borrower’s agent and attorney-in-fact, notify the
United States Postal Service to change the address for delivery of the Borrower’s
mail to any address designated by the Lender, otherwise intercept the Borrower’s
mail, and receive, open and dispose of the Borrower’s mail, applying all
Collateral as permitted under this Agreement and holding all other mail for the
Borrower’s account or forwarding such mail to the Borrower’s last known
address.

 

Section 3.3             Assignment
of Insurance.  As
additional security for the payment and performance of the Obligations, the
Borrower hereby assigns to the Lender any and all monies (including proceeds of
insurance and refunds of unearned premiums) due or to become due under, and all
other rights of the Borrower with respect to, any and all policies of insurance
now or at any time hereafter covering the Collateral or any evidence thereof or
any business records or valuable papers pertaining thereto, and the Borrower
hereby directs the issuer of any such policy to pay all such monies directly to
the Lender.  At any time, whether or not
a Default Period then exists, the Lender may (but need not), in the Lender’s
name or in the Borrower’s name, execute and deliver proof of claim, receive all
such monies, endorse checks and other instruments representing payment of such
monies, and adjust, litigate, compromise or release any claim against the
issuer of any such policy.

 

Section 3.4             Occupancy.

 

(a)           The Borrower hereby irrevocably grants to the Lender
the right to take exclusive possession of the Premises at any time during a
Default Period without notice or consent.

 

(b)           The Lender may use the Premises only to hold,
process, manufacture, sell, use, store, liquidate, realize upon or otherwise
dispose of goods that are Collateral and for other purposes that the Lender may
in good faith deem to be related or incidental purposes.

 

(c)           The Lender’s right to hold the Premises shall cease
and terminate upon the earlier of (i) payment in full and discharge of all
Obligations and termination of the Credit Facility, and (ii) final sale or
disposition of all goods constituting Collateral and delivery of all such goods
to purchasers.

 

(d)           The Lender shall not be obligated to pay or account for any rent or
other compensation for the possession, occupancy or use of any of the Premises;
provided, however, that if the Lender does pay or account for any rent or other
compensation for the possession, occupancy or use of any of the Premises, the
Borrower shall reimburse the Lender promptly for the full amount thereof.  In addition, the Borrower will pay, or
reimburse the Lender for, all taxes, fees, duties, imposts, charges and
expenses at any time incurred by or imposed upon the Lender by reason of the
execution, delivery, existence, recordation, performance or enforcement of this
Agreement or the provisions of this Section 3.4.

 

Section 3.5             License.  Without limiting the generality of any other
Security Document, the Borrower hereby grants to the Lender a non-exclusive,
worldwide and royalty-free license to use or otherwise exploit all Intellectual
Property Rights of the Borrower for the purpose of:  (a) completing the manufacture of any
in-process materials during any Default Period so that such

 

27

 

materials become saleable Inventory, all in accordance
with the same quality standards previously adopted by the Borrower for its own
manufacturing and subject to the Borrower’s reasonable exercise of quality
control; and (b) selling, leasing or otherwise disposing of any or all
Collateral during any Default Period.

 

Section 3.6             Financing
Statement.  The
Borrower authorizes the Lender to file from time to time, such financing
statements against collateral described as “all personal property” or “all
assets” or describing specific items of collateral including commercial tort
claims as the Lender deems necessary or useful to perfect the Security
Interest.  All financing statements filed
before the date hereof to perfect the Security Interest were authorized by the
Borrower and are hereby re-authorized.  A
carbon, photographic or other reproduction of this Agreement or of any financing
statements signed by the Borrower is sufficient as a financing statement and
may be filed as a financing statement in any state to perfect the security
interests granted hereby.  For this
purpose, the Borrower represents and warrants that the following information is
true and correct:

 

Name and address of Debtor:

 

Waters Instruments, Inc.

13705 26th Avenue North, Suite 102

Plymouth, MN  55441

Federal Employer Identification No. 
41-0832194

Organizational Identification No.  X-49

 

Name and address of Secured Party:

 

Wells Fargo Business Credit, Inc.

Sixth and Marquette, MAC N9312-040

Minneapolis, MN  55479

 

Section 3.7             Setoff.  The Lender may at any time or from time to
time, at its sole discretion and without demand and without notice to anyone,
setoff any liability owed to the Borrower by the Lender, whether or not due,
against any Obligation, whether or not due. 
In addition, each other Person holding a participating interest in any
Obligations shall have the right to appropriate or setoff any deposit or other
liability then owed by such Person to the Borrower, whether or not due, and
apply the same to the payment of said participating interest, as fully as if
such Person had lent directly to the Borrower the amount of such participating
interest.

 

Section 3.8             Collateral.  This Agreement does not contemplate a sale of
accounts, contract rights or chattel paper, and, as provided by law, the
Borrower is entitled to any surplus and shall remain liable for any
deficiency.  The Lender’s duty of care
with respect to Collateral in its possession (as imposed by law) shall be
deemed fulfilled if it exercises reasonable care in physically keeping such
Collateral, or in the case of Collateral in the custody or possession of a
bailee or other third person, exercises reasonable care in the selection of the
bailee or other third person, and the Lender need not otherwise preserve,
protect, insure or care for any Collateral. 
The Lender shall not be obligated to preserve any rights the Borrower
may have against prior parties, to realize on the Collateral at all or in any
particular manner or order or to apply any cash

 

28

 

proceeds of the Collateral in any particular order of
application.  The Lender has no
obligation to clean-up or otherwise prepare the Collateral for sale.  The Borrower waives any right it may have to
require the Lender to pursue any third person for any of the Obligations.

 

ARTICLE IV

 

CONDITIONS OF LENDING

 

Section 4.1             Conditions
Precedent to the Initial Advances and Letter of Credit.  The Lender’s obligation to make the initial
Advances or to cause any Letters of Credit to be issued shall be subject to the
condition precedent that the Lender shall have received all of the following,
each properly executed by the appropriate party and in form and substance
satisfactory to the Lender:

 

(a)           This Agreement.

 

(b)           The Notes.

 

(c)           A Standby Letter of Credit Agreement, and L/C
Application for each Letter of Credit that Borrower wishes to have issued
thereunder.

 

(d)           A true and correct copy of any and all leases
pursuant to which the Borrower is leasing the Premises, together with a
landlord’s disclaimer and consent with respect to each such lease.

 

(e)           A true and correct copy of any and all mortgages
pursuant to which the Borrower has mortgaged the Premises, together with a
mortgagee’s disclaimer and consent with respect to each such mortgage.

 

(f)            A true and correct copy of any and all agreements
pursuant to which the Borrower’s property is in the possession of any Person
other than the Borrower, together with, in the case of any goods held by such
Person for resale, (i) a consignee’s acknowledgment and waiver of Liens, (ii)
UCC financing statements sufficient to protect the Borrower’s and the Lender’s
interests in such goods, and (iii) UCC searches showing that no other secured
party has filed a financing statement against such Person and covering property
similar to the Borrower’s other than the Borrower, or if there exists any such
secured party, evidence that each such secured party has received notice from
the Borrower and the Lender sufficient to protect the Borrower’s and the Lender’s
interests in the Borrower’s goods from any claim by such secured party.

 

(g)           An acknowledgment and waiver of Liens from each
warehouse in which the Borrower is storing Inventory.

 

(h)           A true and correct copy of any and all agreements
pursuant to which the Borrower’s property is in the possession of any Person
other than the Borrower, together with, (i) an acknowledgment and waiver
of Liens from each subcontractor who has possession of the Borrower’s goods
from time to time, (ii) UCC financing statements sufficient to protect the
Borrower’s and the Lender’s interests in such goods, and (iii) UCC searches
showing that no

 

29

 

other secured party has filed a financing statement
covering such Person’s property other than the Borrower, or if there exists any
such secured party, evidence that each such secured party has received notice
from the Borrower and the Lender sufficient to protect the Borrower’s and the
Lender’s interests in the Borrower’s goods from any claim by such secured
party.

 

(i)            An acknowledgment and agreement from each licensor
in favor of the Lender, together with a true, correct and complete copy of all
license agreements.

 

(j)            The Life Insurance Assignment, and the Life
Insurance Policy, together with evidence that the Life Insurance Policy is
subject to no assignments or encumbrances other than the Life Insurance
Assignment.

 

(k)           The Lockbox and Collection Account Agreement.

 

(l)            Control agreements with each bank at which the
Borrower maintains deposit accounts.

 

(m)          The Patent and Trademark Security Agreement.

 

(n)           Current searches of appropriate filing offices
showing that (i) no Liens have been filed and remain in effect against the
Borrower except Permitted Liens or Liens held by Persons who have agreed in
writing that upon receipt of proceeds of the initial Advances, they will
satisfy, release or terminate such Liens in a manner satisfactory to the
Lender, and (ii) the Lender has duly filed all financing statements necessary
to perfect the Security Interest, to the extent the Security Interest is
capable of being perfected by filing.

 

(o)           A certificate of the Borrower’s Secretary or
Assistant Secretary certifying that attached to such certificate are (i) the
resolutions of the Borrower’s Directors and, if required, Owners, authorizing
the execution, delivery and performance of the Loan Documents, (ii) true,
correct and complete copies of the Borrower’s Constituent Documents, and (iii)
examples of the signatures of the Borrower’s Officers or agents authorized to
execute and deliver the Loan Documents and other instruments, agreements and
certificates, including Advance requests, on the Borrower’s behalf.

 

(p)           A current certificate issued by the Secretary of
State of Minnesota, certifying that the Borrower is in compliance with all
applicable organizational requirements of the State of Minnesota.

 

(q)           Evidence that the Borrower is duly licensed or
qualified to transact business in all jurisdictions where the character of the
property owned or leased or the nature of the business transacted by it makes
such licensing or qualification necessary.

 

(r)            A certificate of an Officer of the Borrower
confirming, in his official capacity, the representations and warranties set
forth in Article V.

 

(s)           An opinion of counsel to the Borrower, addressed to
the Lender.

 

30

 

(t)            Certificates of the insurance required hereunder,
with all hazard insurance containing a lender’s loss payable endorsement in the
Lender’s favor and with all liability insurance naming the Lender as an
additional insured.

 

(u)           Payment of the fees and commissions due under
Section 2.10 through the date of the initial Advance or Letter of Credit and
expenses incurred by the Lender through such date and required to be paid by
the Borrower under Section 8.5, including all legal expenses incurred through
the date of this Agreement.

 

(v)           Evidence that after (i) making the initial Revolving
Advance, (ii) issuance of any Letters of Credit, (iii) satisfying all
obligations owed to the Borrower’s prior lender, (iv) Wells Fargo Bank, (v)
funding the consummation of the Rutland Acquisition and (vi) satisfying all
trade payables older than 60 days from invoice date, book overdrafts and
closing costs, Availability shall be not less than $350,000.00.

 

(w)          A Customer Identification Information form and such
other forms and verification as Lender may need to comply with the U.S.A. Patriot
Act.

 

(x)            With respect to the Mortgaged Real Estate (i) the
Mortgage, (ii) an appraisal ordered by Lender or its agent of said Real Estate
and all improvements thereon, conforming to Uniform Standards of Professional
Appraisal Practice and issued by a real estate appraiser acceptable to Lender,
reflecting the type of valuation referenced in Section 2.7(a) values acceptable
to Lender in its discretion, (iii) an American Land Title Association policy of
title insurance, with such endorsements as Lender may require, issued by an
insurer in such amounts as Lender may require, insuring Lender’s first priority
lien on said Real Estate, subject only to such exceptions as Lender in its
discretion may approve, together with such evidence relating to the payment of
liens or potential liens as Lender may require, and (iv) an American Land
Title Association survey certified to the Lender and to the title company that
is acceptable to Lender.

 

(y)           With respect to the Mortgaged Real Estate a current
environmental site assessment indicating that the Real Estate is subject to no “recognized
environmental conditions”, as that term is defined by the American Society for
Testing and Materials, in its standards for environmental due diligence, and is
not in need of remedial action to avoid subjecting its owner to any present or
future liability or contingent liability with respect to the release of toxic
or hazardous wastes or substances.

 

(z)            With respect to the Mortgaged Real Estate (i) a
flood hazard determination form, confirming whether or not the parcel is in a
flood hazard area and whether or not flood insurance must be obtained, and,
(ii) if the Real Estate is located in a flood hazard area, a policy of flood
insurance.

 

31

 

(aa)         With respect to the Mortgaged Real Estate, copies of
management services and maintenance contracts, fire, health and safety reports,
certificates of occupancy, leases and rent rolls, and such other information
relating to the Real Estate and the improvements thereon that Lender in its
discretion deems necessary.

 

(bb)         With respect to the Equipment that is designated by
the Lender in its sole discretion as eligible to support the Equipment Term
Advance, an appraisal ordered by Lender or its agent of said Equipment and
issued by an equipment appraiser acceptable to Lender reflecting the type of
valuation referenced in Section 2.5(a).

 

(cc)         Evidence satisfactory to the Lender that Zareba
Europe has been funded by Borrower in accordance with Section 5.19 and that the
Rutland Acquisition has been consummated in accordance with the terms of the
Rutland Agreement as certified in accordance with Section 5.19.

 

(dd)         Such other documents as the Lender in its sole
discretion may require.

 

Section 4.2             Conditions
Precedent to All Advances and Letters of Credit.  The Lender’s obligation to make each Advance
and to cause each Letter of Credit to be issued shall be subject to the further
conditions precedent that:

 

(a)           the representations and warranties contained in
Article V are correct on and as of the date of such Advance or issuance of a
Letter of Credit as though made on and as of such date, except to the extent
that such representations and warranties relate solely to an earlier date; and

 

(b)           no event has occurred and is continuing, or would
result from such Advance or issuance of a Letter of Credit which constitutes a
Default or an Event of Default.

 

ARTICLE V

 

REPRESENTATIONS AND
WARRANTIES

 

The Borrower represents and warrants to the Lender as
follows:

 

Section 5.1             Existence
and Power; Name; Chief Executive Office; Inventory and Equipment
Locations; Federal Employer Identification Number and Organizational
Identification Number.  The Borrower
is a corporation, duly organized, validly existing and in good standing under
the laws of the State of Minnesota and is duly licensed or qualified to
transact business in all jurisdictions where the character of the property
owned or leased or the nature of the business transacted by it makes such
licensing or qualification necessary. 
The Borrower has all requisite power and authority to conduct its
business, to own its properties and to execute and deliver, and to perform all
of its obligations under, the Loan Documents. 
During its existence, the Borrower has done business solely under the
names set forth in Schedule 5.1.  The
Borrower’s chief executive office and principal place of business is located at
the address set forth in Schedule 5.1, and all of the Borrower’s records
relating to its business or the Collateral are kept at that location.  All Inventory and Equipment is located at
that location or at one of the other locations

 

32

 

listed in Schedule 5.1.  The Borrower’s federal employer
identification number and organization identification number are correctly set
forth in Section 3.6.

 

Section 5.2             Capitalization.  To the Borrower’s knowledge, Schedule 5.2
constitutes a correct and complete list of all Persons holding more than five
percent (5%) of all ownership interests, as of August 23, 2004, of the
Borrower, (excluding rights to acquire ownership interests), and an
organizational chart showing the ownership structure of all Subsidiaries of the
Borrower.

 

Section 5.3             Authorization
of Borrowing; No Conflict as to Law or Agreements.  The execution, delivery and performance by
the Borrower of the Loan Documents and the borrowings from time to time
hereunder have been duly authorized by all necessary corporate action and do
not and will not (i) require any consent or approval of the Borrower’s Owners;
(ii) require any authorization, consent or approval by, or registration,
declaration or filing with, or notice to, any governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign, or any
third party, except such authorization, consent, approval, registration,
declaration, filing or notice as has been obtained, accomplished or given prior
to the date hereof; (iii) violate any provision of any law, rule or regulation
(including Regulation X of the Board of Governors of the Federal Reserve
System) or of any order, writ, injunction or decree presently in effect having
applicability to the Borrower or of the Borrower’s Constituent Documents; (iv)
result in a breach of or constitute a default under any indenture or loan or
credit agreement or any other material agreement, lease or instrument to which
the Borrower is a party or by which it or its properties may be bound or
affected; or (v) result in, or require, the creation or imposition of any
Lien (other than the Security Interest) upon or with respect to any of the
properties now owned or hereafter acquired by the Borrower.

 

Section 5.4             Legal
Agreements.  This
Agreement constitutes and, upon due execution by the Borrower, the other Loan
Documents will constitute the legal, valid and binding obligations of the
Borrower, enforceable against the Borrower in accordance with their respective
terms.

 

Section 5.5             Subsidiaries.  Except as set forth in Schedule 5.5 hereto,
the Borrower has no Subsidiaries.

 

Section 5.6             Financial
Condition; No Adverse Change. 
The Borrower has furnished to the Lender its audited financial
statements for its fiscal year ended June 30, 2003 and unaudited financial
statements for the fiscal-year-to-date period ended June 30, 2004, and
those statements fairly present the Borrower’s financial condition on the dates
thereof and the results of its operations and cash flows for the periods then
ended and were prepared in accordance with generally accepted accounting
principals.  Since the date of the most
recent financial statements, there has been no change in the Borrower’s
business, properties or condition (financial or otherwise) which has had a
Material Adverse Effect.

 

33

 

Section 5.7             Litigation.  There are no actions, suits or proceedings
pending or, to the Borrower’s knowledge, threatened against or affecting the
Borrower or any of its Subsidiaries or the properties of the Borrower or any of
its Subsidiaries before any court or governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign, which, if
determined adversely to the Borrower or any of its Subsidiaries, would have a
Material Adverse Effect, apart from those matters specifically listed in
Schedule 5.7.

 

Section 5.8             Regulation
U.  The 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), and no part of the proceeds of any Advance will be
used to purchase or carry any margin stock or to extend credit to others for
the purpose of purchasing or carrying any margin stock.

 

Section 5.9             Taxes.  The Borrower and its Subsidiaries have paid or
caused to be paid to the proper authorities when due all federal, state and
local taxes required to be withheld by each of them.  The Borrower and its Subsidiaries have filed
all federal, state and local tax returns which to the knowledge of the Officers
of the Borrower or any Subsidiaries, as the case may be, are required to be
filed, and the Borrower and its Subsidiaries have paid or caused to be paid to
the respective taxing authorities all taxes as shown on said returns or on any
assessment received by any of them to the extent such taxes have become due.

 

Section 5.10           Titles
and Liens.  The
Borrower has good and absolute title to all Collateral free and clear of all
Liens other than Permitted Liens.  No
financing statement naming the Borrower as debtor is on file in any office
except to perfect only Permitted Liens.

 

Section 5.11           Intellectual
Property Rights.

 

(a)           Owned
Intellectual Property.  Schedule 5.11 is a complete list of all patents,
applications for patents, trademarks, applications to register trademarks,
service marks, applications to register service marks, mask works, trade dress
and copyrights for which the Borrower is the owner of record (the “Owned
Intellectual Property”).  Except as
disclosed on Schedule 5.11, (i) the Borrower owns the Owned Intellectual
Property free and clear of all restrictions (including covenants not to sue a
third party), court orders, injunctions, decrees, writs or Liens, whether by
written agreement or otherwise, (ii) no Person other than the Borrower owns or
has been granted any right in the Owned Intellectual Property, (iii) all Owned
Intellectual Property is valid, subsisting and enforceable and (iv) the
Borrower has taken all commercially reasonable action necessary to maintain and
protect the Owned Intellectual Property.

 

34

 

(b)           Agreements with
Employees and Contractors.  The Borrower has entered into a legally enforceable
agreement with each of its employees and subcontractors obligating each such
Person to assign to the Borrower, without any additional compensation, any
Intellectual Property Rights created, discovered or invented by such Person in
the course of such Person’s employment or engagement with the Borrower (except
to the extent prohibited by law), and further requiring such Person to
cooperate with the Borrower, without any additional compensation, in connection
with securing and enforcing any Intellectual Property Rights therein; provided,
however, that the foregoing shall not apply with respect to employees and
subcontractors whose job descriptions are of the type such that no such
assignments are reasonably foreseeable.

 

(c)           Intellectual Property
Rights Licensed from Others.  Schedule 5.11 is a complete list of all agreements
under which the Borrower has licensed Intellectual Property Rights from another
Person (“Licensed Intellectual Property”) other than readily available,
non-negotiated licenses of computer software and other intellectual property
used solely for performing accounting, word processing and similar
administrative tasks (“Off-the-shelf Software”) and a summary of any ongoing
payments the Borrower is obligated to make with respect thereto.  Except as disclosed on Schedule 5.11 and in
written agreements copies of which have been given to the Lender, the Borrower’s
licenses to use the Licensed Intellectual Property are free and clear of all
restrictions, Liens, court orders, injunctions, decrees, or writs, whether by
written agreement or otherwise.  Except
as disclosed on Schedule 5.11, the Borrower is not obligated or under any
liability whatsoever to make any payments of a material nature by way of
royalties, fees or otherwise to any owner of, licensor of, or other claimant
to, any Intellectual Property Rights.

 

(d)           Other Intellectual Property
Needed for Business.  Except for Off-the-shelf Software and as disclosed
on Schedule 5.11, the Owned Intellectual Property and the Licensed Intellectual
Property constitute all Intellectual Property Rights used or necessary to
conduct the Borrower’s business as it is presently conducted or as the Borrower
reasonably foresees conducting it.

 

(e)           Infringement.  Except as
disclosed on Schedule 5.11, the Borrower has no knowledge of, and has not
received any written claim or notice alleging, any Infringement of another
Person’s Intellectual Property Rights (including any written claim that the
Borrower must license or refrain from using the Intellectual Property Rights of
any third party) nor, to the Borrower’s knowledge, is there any threatened
claim or any reasonable basis for any such claim.

 

Section 5.12           Plans.  Except as disclosed to the Lender in writing
prior to the date hereof, neither the Borrower nor any ERISA Affiliate (i)
maintains or has maintained any Pension Plan, (ii) contributes or has contributed
to any Multiemployer Plan or (iii) provides or has provided post-retirement
medical or insurance benefits with respect to employees or former employees
(other than benefits required under Section 601 of ERISA, Section 4980B of the
IRC or applicable state law).  Neither
the Borrower nor any ERISA Affiliate has received any notice or has any
knowledge to the effect that it is not in full compliance with any of the
requirements of ERISA, the IRC or applicable state law with respect to any
Plan.  No Reportable Event exists

 

35

 

in connection with any Pension Plan.  Each Plan which is intended to qualify under
the IRC is so qualified, and no fact or circumstance exists which may have an
adverse effect on the Plan’s tax qualified status.  Neither the Borrower nor any ERISA Affiliate
has (i) any accumulated funding deficiency (as defined in Section 302 of ERISA
and Section 412 of the IRC) under any Plan, whether or not waived, (ii) any
liability under Section 4201 or 4243 of ERISA for any withdrawal, partial
withdrawal, reorganization or other event under any Multiemployer Plan or (iii)
any liability or knowledge of any facts or circumstances which could result in
any liability to the Pension Benefit Guaranty Corporation, the Internal Revenue
Service, the Department of Labor or any participant in connection with any Plan
(other than routine claims for benefits under the Plan).

 

Section 5.13           Default.  The Borrower is in compliance with all
provisions of all agreements, instruments, decrees and orders to which it is a
party or by which it or its property is bound or affected, the breach or
default of which could have a Material Adverse Effect.

 

Section 5.14           Environmental
Matters.

 

(a)           Except as disclosed on Schedule 5.14, to the
Borrower’s knowledge there are not present in, on or under the Premises any
Hazardous Substances in such form or quantity as to create any material
liability or obligation for either the Borrower or the Lender under the common
law of any jurisdiction or under any Environmental Law, and no Hazardous
Substances have ever been stored, buried, spilled, leaked, discharged, emitted
or released in, on or under the Premises in such a way as to create any such
material liability.

 

(b)           Except as disclosed on Exhibit 5.14, the Borrower
has not disposed of Hazardous Substances in such a manner as to create any
material liability under any Environmental Law.

 

(c)           Except as disclosed on Schedule 5.14, to the
Borrower’s knowledge there have not existed in the past, nor are there any
threatened or impending requests, claims, notices, investigations, demands,
administrative proceedings, hearings or litigation relating in any way to the
Premises or the Borrower, alleging material liability under, violation of, or
noncompliance with any Environmental Law or any license, permit or other
authorization issued pursuant thereto.

 

(d)           Except as disclosed on Schedule 5.14, the Borrower’s
businesses are and have in the past always been conducted in accordance with
all Environmental Laws and all licenses, permits and other authorizations
required pursuant to any Environmental Law and necessary for the lawful and
efficient operation of such businesses are in the Borrower’s possession and are
in full force and effect, nor has Borrower been denied insurance on grounds
related to potential environmental liability. 
No permit required under any Environmental Law is scheduled to expire
within 12 months and the Borrower has not received any notice that any such
permit will be withdrawn, terminated, limited or materially changed.

 

(e)           Except as disclosed on Schedule 5.14, to the
Borrower’s knowledge the Premises are not and never have been listed on the
National Priorities List, the Comprehensive Environmental Response,
Compensation and Liability Information System or any similar federal, state or
local list, schedule, log, inventory or database.

 

36

 

(f)            The Borrower has delivered to the Lender all
environmental assessments, audits, reports, permits, licenses and other
documents describing or relating in any way to the Premises or Borrower’s
businesses.

 

Section 5.15           Submissions
to Lender.  All
financial and other information provided to the Lender by or on behalf of the
Borrower in connection with the Borrower’s request for the credit facilities
contemplated hereby is (i) true and correct in all material respects, (ii) does
not omit any material fact necessary to make such information not misleading
and, (iii) as to projections, valuations or proforma financial statements,
present a good faith opinion as to such projections, valuations and proforma
condition and results.

 

Section 5.16           Financing
Statements.  The
Borrower has authorized the filing of financing statements sufficient when filed
to perfect the Security Interest and the other security interests created by
the Security Documents.  When such
financing statements are filed in the offices noted therein, the Lender will
have a valid and perfected security interest in all Collateral which is capable
of being perfected by filing financing statements.  None of the Collateral is or will become a
fixture on real estate, unless a sufficient fixture filing is in effect with
respect thereto.

 

Section 5.17           Rights
to Payment.  Each right
to payment and each instrument, document, chattel paper and other agreement
constituting or evidencing Collateral is (or, in the case of all future
Collateral, will be when arising or issued) the valid, genuine and legally
enforceable obligation, subject to no defense, setoff or counterclaim, of the
account debtor or other obligor named therein or in the Borrower’s records
pertaining thereto as being obligated to pay such obligation.

 

Section 5.18           Financial
Solvency.  Both before and after
giving effect to the Rutland Acquisition and all of the transactions
contemplated in the Loan Documents, none of the Borrower or its Subsidiaries:

 

(a)           Was or will be insolvent, as that term is used and
defined in Section 101(32) of the United States Bankruptcy Code and Section 2
of the Uniform Fraudulent Transfer Act;

 

(b)           Has unreasonably small capital or is engaged or
about to engage in a business or a transaction for which any remaining assets
of the Borrower or such Affiliate are unreasonably small;

 

(c)           By executing, delivering or performing its
obligations under the Loan Documents or other documents to which it is a party
or by taking any action with respect thereto, intends to, nor believes that it
will, incur debts beyond its ability to pay them as they mature;

 

(d)           By executing, delivering or performing its
obligations under the Loan Documents or other documents to which it is a party
or by taking any action with respect thereto, intends to hinder, delay or
defraud either its present or future creditors; and

 

37

 

(e)           At this time contemplates filing a petition in bankruptcy or for an
arrangement or reorganization or similar proceeding under any law of any
jurisdiction, nor, to the best knowledge of the Borrower, is the subject of any
actual, pending or threatened bankruptcy, insolvency or similar proceedings
under any law of any jurisdiction.

 

Section 5.19       Rutland Acquisition.  Zareba Europe is a United Kingdom private
company duly organized and in good standing under the laws of the United
Kingdom and Borrower owns 100% of the equity interests issued thereby.  Zareba Europe has, both before and after
consummation of the Rutland Acquisition, and the Subsidiaries to be acquired
pursuant to the Rutland Acquisition will, after consummation of the Rutland
Acquisition, have all requisite power and authority to conduct their
businesses, to own their properties and to execute and deliver and to perform
all of their obligations, if any, under the Rutland Agreement.  The Borrower has furnished to Lender a copy
of the Rutland Agreement, as executed by the parties thereto, certified as true
and correct by an officer of the Borrower as of the date hereof.  Consummation of the Rutland Acquisition will
not require the Borrower to advance to or invest in Zareba Europe an amount
greater than $5,130,000.00.

 

ARTICLE VI

 

COVENANTS

 

So long as the Obligations shall remain unpaid, or the
Credit Facility shall remain outstanding, the Borrower will comply with the
following requirements, unless the Lender shall otherwise consent in writing:

 

Section 6.1             Reporting
Requirements.  The
Borrower will deliver, or cause to be delivered, to the Lender each of the
following, which shall be in form and detail acceptable to the Lender:

 

(a)           Annual Financial Statements.  As soon as
available, and in any event within 90 days after the end of each fiscal year of
the Borrower, the Borrower will deliver, or cause to be delivered, to the
Lender, the Borrower’s audited financial statements with the unqualified
opinion of independent certified public accountants selected by the Borrower
and acceptable to the Lender, which annual financial statements shall include
the Borrower’s balance sheet as at the end of such fiscal year and the related
statements of the Borrower’s income, retained earnings and cash flows for the
fiscal year then ended, prepared, if the Lender so requests, on a consolidating
and consolidated basis to include any ‘Subsidiaries, all in reasonable detail
and prepared in accordance with GAAP, together with (i) copies of all
management letters prepared by such accountants; (ii) a report signed by such
accountants stating that in making the investigations necessary for said
opinion they obtained no knowledge, except as specifically stated, of any
Default or Event of Default and all relevant facts in reasonable detail to
evidence, and the computations as to, whether or not the Borrower is in
compliance with the Financial Covenants; and (iii) a certificate of the
Borrower’s chief financial officer stating that such financial statements have
been prepared in accordance with GAAP, fairly represent the Borrower’s
financial position and the results of its operations, and whether or not such
Officer

 

38

 

has knowledge of the occurrence of any Default or Event of
Default and, if so, stating in reasonable detail the facts with respect
thereto.

 

(b)           Monthly Financial
Statements.  As soon as available and in any event within 30 days after the end of
each month, the Borrower will deliver to the Lender an unaudited/internal
balance sheet and statements of income and retained earnings of the Borrower as
at the end of and for such month and for the year to date period then ended,
prepared, if the Lender so requests, on a consolidating and consolidated basis
to include any Subsidiaries, in reasonable detail and stating in comparative
form the figures for the corresponding date and periods in the previous year,
all prepared in accordance with GAAP, subject to year-end audit adjustments and
which fairly represent the Borrower’s financial position and the results of its
operations; and accompanied by a certificate of the Borrower’s chief financial
officer, substantially in the form of Exhibit D hereto stating (i) that such
financial statements have been prepared in accordance with GAAP, subject to
year-end audit adjustments, and fairly represent the Borrower’s financial
position and the results of its operations (ii) whether or not such Officer has
knowledge of the occurrence of any Default or Event of Default not theretofore
reported and remedied and, if so, stating in reasonable detail the facts with
respect thereto, and (iii) all relevant facts in reasonable detail to evidence,
and the computations as to, whether or not the Borrower is in compliance with
the Financial Covenants.

 

(c)           Collateral
Reports.  Within
10 days after the end of each month or more frequently if the Lender so
requires, the Borrower will deliver to the Lender, or its designated agent,
agings of the Borrower’s accounts receivable and its accounts payable, an
inventory certification report, and a calculation of the Borrower’s Accounts,
Eligible Accounts, Inventory and Eligible Inventory as at the end of such month
or shorter time period.

 

(d)           Projections.  No later
than 30 days prior to the beginning of each fiscal year of the Borrower, the
Borrower will deliver to the Lender the projected balance sheets, income
statements, statements of cash flow and projected Availability for each month
of the succeeding fiscal year, each in reasonable detail.  Such items will be  certified by the Borrower’s chief financial
officer as being the most accurate projections available and identical to the
projections used by the Borrower for internal planning purposes and be
delivered with a statement of underlying assumptions and such supporting
schedules and information as the Lender may in its discretion require.

 

(e)           Supplemental
Reports.  Daily,
the Borrower will deliver to the Lender the “daily collateral reports”,
receivables schedules, collection reports, copies of invoices to account
debtors in excess of $100,000.00 signed and dated shipment documents and
delivery receipts for goods sold to said account debtors in excess of
$100,000.00.

 

(f)            Litigation.  Immediately
after the commencement thereof, the Borrower will deliver to the Lender notice
in writing of all litigation and of all proceedings before any governmental or
regulatory agency affecting the Borrower (i) of the type described in Section
5.14(c) or (ii) which seek a monetary recovery against the Borrower in excess
of $250,000.00.

 

39

 

(g)           Defaults.  When any
Officer of the Borrower becomes aware of the probable occurrence of any Default
or Event of Default, the Borrower will deliver to the Lender, no later than
three days after such officer becomes aware of such Default or Event of
Default, notice of such occurrence, together with a detailed statement by a
responsible Officer of the Borrower of the steps being taken by the Borrower to
cure the effect thereof.

 

(h)           Plans.  As soon as
possible, and in any event within 30 days after the Borrower knows or has
reason to know that any Reportable Event with respect to any Pension Plan has
occurred, the Borrower will deliver to the Lender a statement of the Borrower’s
chief financial officer setting forth details as to such Reportable Event and
the action which the Borrower proposes to take with respect thereto, together
with a copy of the notice of such Reportable Event to the Pension Benefit
Guaranty Corporation.  As soon as
possible, and in any event within 10 days after the Borrower fails to make any
quarterly contribution required with respect to any Pension Plan under Section
412(m) of the IRC, the Borrower will deliver to the Lender a statement of the
Borrower’s chief financial officer setting forth details as to such failure and
the action which the Borrower proposes to take with respect thereto, together
with a copy of any notice of such failure required to be provided to the
Pension Benefit Guaranty Corporation.  As
soon as possible, and in any event within ten days after the Borrower knows or
has reason to know that it has or is reasonably expected to have any liability
under Section 4201 or 4243 of ERISA for any withdrawal, partial withdrawal,
reorganization or other event under any Multiemployer Plan, the Borrower will
deliver to the Lender a statement of the Borrower’s chief financial officer
setting forth details as to such liability and the action which the Borrower
proposes to take with respect thereto.

 

(i)            Disputes.  Promptly
upon knowledge thereof, the Borrower will deliver to the Lender notice of (i)
any disputes or claims by the Borrower’s customers exceeding $50,000.00
individually or $100,000.00 in the aggregate during any fiscal year; (ii)
credit memos; and (iii) any goods returned to or recovered by the
Borrower.

 

(j)            Officers and
Directors.  Promptly upon knowledge thereof, the Borrower will deliver to the
Lender notice any change in the persons constituting the Borrower’s Officers
and Directors.

 

(k)           Collateral.  Promptly
upon knowledge thereof, the Borrower will deliver to the Lender notice of any
loss of or material damage to any Collateral or of any substantial adverse
change in any Collateral or the prospect of payment thereof.

 

(l)            Commercial
Tort Claims.  Promptly upon knowledge thereof, the Borrower will deliver to the
Lender notice of any commercial tort claims it may bring against any Person,
including the name and address of each defendant, a summary of the facts, an
estimate of the Borrower’s damages, copies of any complaint or demand letter
submitted by the Borrower, and such other information as the Lender may
request.

 

40

 

(m)          Intellectual Property.

 

(i)            The Borrower
will give the Lender 30 days prior written notice of its intent to acquire
material Intellectual Property Rights; except for transfers permitted under
Section 6.18, the Borrower will give the Lender 30 days prior written notice of
its intent to dispose of material Intellectual Property Rights and upon request
shall provide the Lender with copies of all proposed documents and agreements
concerning such rights.

 

(ii)           Promptly
upon knowledge thereof, the Borrower will deliver to the Lender notice of (A)
any Infringement of its Intellectual Property Rights by others, (B) claims that
the Borrower is Infringing another Person’s Intellectual Property Rights and
(C) any threatened cancellation, termination or material limitation of its
Intellectual Property Rights.

 

(iii)          Promptly
upon receipt, the Borrower will give the Lender copies of all registrations and
filings with respect to its Intellectual Property Rights.

 

(n)           Reports to Owners.  Promptly
upon their distribution, the Borrower will deliver to the Lender copies of all
financial statements, reports and proxy statements which the Borrower shall
have sent to its Owners.

 

(o)           SEC Filings.  Promptly
after the sending or filing thereof, the Borrower will deliver to the Lender
copies of all regular and periodic reports which the Borrower shall file with
the Securities and Exchange Commission or any national securities exchange.

 

(p)           Tax
Returns of Borrower.  As soon as possible, and in any event no later than
five days after they are due to be filed, copies of the state and federal
income tax returns and all schedules thereto of Borrower.

 

(q)           Violations of Law.  Promptly
upon knowledge thereof, the Borrower will deliver to the Lender notice of the
Borrower’s violation of any law, rule or regulation, the non-compliance with
which could have a Material Adverse Effect on the Borrower.

 

(r)            Other
Reports.  From
time to time, with reasonable promptness, the Borrower will deliver to the
Lender any and all receivables schedules, collection reports, deposit records,
equipment schedules, copies of invoices to account debtors, shipment documents
and delivery receipts for goods sold, and such other material, reports, records
or information as the Lender may request.

 

Section 6.2             Financial
Covenants.

 

(a)           Minimum
Year-To-Date Earnings Before Taxes.  The Borrower will achieve through end of each fiscal
month described below, fiscal year-to-date Earnings Before Taxes, of not less
than the amount set forth opposite such period (numbers appearing between “<
>“ are negative):

 

41

 

 

	
  Month

  	
   

  	
  Amount

  	
   

  
	
  September, 2004

  	
   

  	
  $

  	
  400,000.00

  	
   

  
	
  October, 2004

  	
   

  	
  $

  	
  300,000.00

  	
   

  
	
  November, 2004

  	
   

  	
  $

  	
  75,000.00

  	
   

  
	
  December, 2004

  	
   

  	
  $

  	
  <150,000.00

  	
  >

  
	
  January, 2005

  	
   

  	
  $

  	
  <150,000.00

  	
  >

  
	
  February, 2005

  	
   

  	
  $

  	
  <150,000.00

  	
  >

  
	
  March, 2005

  	
   

  	
  $

  	
  <100,000.00

  	
  >

  
	
  April, 2005

  	
   

  	
  $

  	
  300,000.00

  	
   

  
	
  May, 2005

  	
   

  	
  $

  	
  800,000.00

  	
   

  
	
  June, 2005

  	
   

  	
  $

  	
  1,250,000.00

  	
   

  
	
  July, 2005 and of each year thereafter

  	
   

  	
  $

  	
  100,000.00

  	
   

  
	
  August, 2005 and of each year thereafter

  	
   

  	
  $

  	
  200,000.00

  	
   

  
	
  September, 2005 and of each year thereafter

  	
   

  	
  $

  	
  400,000.00

  	
   

  
	
  October, 2005 and of each year thereafter

  	
   

  	
  $

  	
  300,000.00

  	
   

  
	
  November, 2005 and of each year thereafter

  	
   

  	
  $

  	
  75,000.00

  	
   

  
	
  December, 2005 and of each year thereafter

  	
   

  	
  $

  	
  <150,000.00

  	
  >

  
	
  January, 2006 and of each year thereafter

  	
   

  	
  $

  	
  <150,000.00

  	
  >

  
	
  February, 2006 and of each year thereafter

  	
   

  	
  $

  	
  <150,000.00

  	
  >

  
	
  March, 2006 and of each year thereafter

  	
   

  	
  $

  	
  <100,000.00

  	
  >

  
	
  April, 2006 and of each year thereafter

  	
   

  	
  $

  	
  300,000.00

  	
   

  
	
  May, 2006 and of each year thereafter

  	
   

  	
  $

  	
  750,000.00

  	
   

  
	
  June, 2006 and of each year thereafter

  	
   

  	
  $

  	
  1,000,000.00

  	
   

  

 

(b)           Minimum Debt Service
Coverage Ratio.  The Borrower will maintain, from the date of this Agreement until all
Obligations are indefeasibly paid in full and this Agreement is terminated, its
Debt Service Coverage Ratio, determined at the end of the most recently ended
fiscal year of the Borrower for which financial statements have been furnished
under Section 6.1(b), at not less than  1.05
to 1.00.

 

(c)           Capital
Expenditures.  The Borrower will not incur or contract to incur unfinanced Capital
Expenditures of more than $350,000.00 in the aggregate during any fiscal year.

 

(d)           Stop Loss.  The Borrower
will not, during any single month, suffer a Net Loss in excess of $300,000.00,
commencing with the month of September, 2004.

 

Section 6.3             Permitted
Liens; Financing Statements.

 

(a)           The Borrower will not create, incur or suffer to
exist any Lien upon or of any of its assets, now owned or hereafter acquired,
to secure any indebtedness; excluding, however, from the operation of the
foregoing, the following (each a “Permitted Lien”; collectively, “Permitted
Liens”):

 

42

 

(i)            In the
case of any of the Borrower’s property which is not Collateral, covenants,
restrictions, rights, easements and minor irregularities in title which do not
materially interfere with the Borrower’s business or operations as presently
conducted;

 

(ii)           Liens in
existence on the date hereof and listed in Schedule 6.3 hereto, securing
indebtedness for borrowed money permitted under Section 6.4;

 

(iii)          The
Security Interest and Liens created by the Security Documents; and

 

(iv)          Purchase
money Liens relating to the acquisition of machinery and equipment of the
Borrower not exceeding the lesser of cost or fair market value thereof, not
exceeding $350,000.00 in the aggregate during any fiscal year, and so long as
no Default Period is then in existence and none would exist immediately after
such acquisition.

 

(b)           The Borrower will not amend any financing statements
in favor of the Lender except as permitted by law.  Any authorization by the Lender to any Person
to amend financing statements in favor of the Lender shall be in writing.

 

Section 6.4             Indebtedness.  The Borrower will not incur, create, assume
or permit to exist any indebtedness or liability on account of deposits or
advances or any indebtedness for borrowed money or letters of credit issued on
the Borrower’s behalf, or any other indebtedness or liability evidenced by
notes, bonds, debentures or similar obligations, except:

 

(a)           Indebtedness arising hereunder;

 

(b)           Indebtedness of the Borrower in existence on the
date hereof and listed in Schedule 6.4 hereto; and

 

(c)           Indebtedness relating to Permitted Liens.

 

Section 6.5             Guaranties.  The Borrower will not assume, guarantee,
endorse or otherwise become directly or contingently liable in connection with
any obligations of any other Person, except:

 

(a)           The endorsement of negotiable instruments by the
Borrower for deposit or collection or similar transactions in the ordinary
course of business; and

 

(b)           Guaranties, endorsements and other direct or
contingent liabilities in connection with the obligations of other Persons, in
existence on the date hereof and listed in Schedule 6.5 hereto.

 

43

 

Section 6.6             Investments
and Subsidiaries.  The
Borrower will not make or permit to exist any loans or advances to, or make any
investment or acquire any interest whatsoever in, any other Person or
Affiliate, including any partnership or joint venture, nor purchase or hold
beneficially any stock or other securities or evidence of indebtedness of any
other person or Affiliate, except:

 

(a)           Investments in direct obligations of the United
States of America or any agency or instrumentality thereof whose obligations
constitute full faith and credit obligations of the United States of America
having a maturity of one year or less, commercial paper issued by U.S.  corporations rated “A 1” or “A 2” by Standard
& Poor’s Ratings Services or “P 1” or “P 2” by Moody’s Investors Service or
certificates of deposit or bankers’ acceptances having a maturity of one year
or less issued by members of the Federal Reserve System having deposits in
excess of $100,000,000 (which certificates of deposit or bankers’ acceptances
are fully insured by the Federal Deposit Insurance Corporation);

 

(b)           Travel advances or loans to the Borrower’s Officers
and employees not exceeding at any one time an aggregate of $25,000.00.

 

(c)           Prepaid rent not exceeding one month or security
deposits; and

 

(d)           Current investments in the Subsidiaries in existence
on the date hereof or proposed to be made in connection with the Rutland
Acquisition and in each case listed in Schedule 5.5 hereto.

 

The Borrower will promptly advise the Lender in
writing of any change, supplement or amendment 
to the Rutland Agreement.

 

Section 6.7             Dividends
and Distributions. 
Except as otherwise set forth in this Section 6.7, the Borrower
will not declare or pay any dividends (other than dividends payable solely in
stock of the Borrower) on any class of its stock or make any payment on account
of the purchase, redemption or other retirement of any shares of such stock or
options, warrants or other rights to buy such stock or make any distribution in
respect thereof, either directly or indirectly; provided that, the
Borrower may pay regularly scheduled dividends and/or repurchase its
outstanding common stock or options, warrants or other rights to buy such stock
if:  (a) all payments in connection with
any of the foregoing are made in cash; (b) the aggregate amount paid by the
Borrower in respect of all such payments will not exceed $100,000 in any fiscal
year of the Borrower; and (c) at the time any such payment is made, and
immediately after giving effect thereto, no Default, or Event of Default will
exist or result therefrom.

 

Section 6.8             Salaries.  The Borrower will not pay excessive or
unreasonable salaries, bonuses, commissions, consultant fees or other
compensation; or increase the salary, bonus, commissions, consultant fees or
other compensation of any Director, Officer or consultant, or any member of
their families, by more than 10% in any one year, either individually or for
all such persons in the aggregate, or pay any such increase from any source
other than profits earned in the year of payment.

 

44

 

Section 6.9             Key
Person Life Insurance. 
The Borrower shall maintain insurance upon the life of Jerry W.
Grabowski, its President and Chief Executive Officer with the death benefit
thereunder in an amount not less than $1,000,000.00 (the “Life Insurance Policy”).  The right to receive the proceeds of the Life
Insurance Policy shall be assigned to the Lender by the Life Insurance
Assignment.

 

Section 6.10           Books and Records;
Collateral Examination, Inspection and Appraisals.

 

(a)           The Borrower will keep accurate books of record and
account for itself pertaining to the Collateral and pertaining to the Borrower’s
business and financial condition and such other matters as the Lender may from
time to time request in which true and complete entries will be made in
accordance with GAAP and, upon the Lender’s request, will permit any officer,
employee, attorney, accountant or other agent of Lender to audit, review, make
extracts from or copy any and all company and financial books and records of
the Borrower at all times during ordinary business hours, to send and discuss
with account debtors and other obligors requests for verification of amounts
owed to the Borrower, and to discuss the Borrower’s affairs with any of its
Directors, Officers, employees or agents.

 

(b)           The Borrower hereby irrevocably authorizes all
accountants and third parties to disclose and deliver to Lender or its
designated agent, at the Borrower’s expense, all financial information, books
and records, work papers, management reports and other information in their
possession regarding the Borrower.

 

(c)           The Borrower will permit the Lender or its
employees, accountants, attorneys or agents, to examine and inspect any
Collateral or any other property of the Borrower at any time during ordinary
business hours.

 

(d)           The Lender may also, from time to time, during the
continuance of an Event of Default, no more than once each calendar year,
obtain at the Borrower’s expense an appraisal of any of Collateral and/or the
Mortgaged Real Estate by an appraiser acceptable to the Lender in its sole
discretion.

 

Section 6.11           Account
Verification.

 

(a)           The Lender or its agent may at any time and from
time to time send or require the Borrower to send requests for verification of
accounts or notices of assignment to account debtors and other obligors.  The Lender or its agent may also at any time
and from time to time telephone account debtors and other obligors to verify
accounts.

 

(b)           The Borrower shall pay when due each account payable
due to a Person holding a Permitted Lien (as a result of such payable) on any
Collateral.

 

45

 

Section 6.12           Compliance
with Laws.

 

(a)           The Borrower will (i) comply with the requirements
of applicable laws and regulations, the non compliance with which would
materially and adversely affect its business or its financial condition and
(ii) use and keep the Collateral, and require that others use and keep the
Collateral, only for lawful purposes, without violation of any federal, state
or local law, statute or ordinance.

 

(b)           Without limiting the foregoing undertakings, the Borrower specifically
agrees that it will comply with all applicable Environmental Laws and obtain
and comply with all permits, licenses and similar approvals required by any
Environmental Laws, and will not generate, use, transport, treat, store or
dispose of any Hazardous Substances in such a manner as to create any material
liability or obligation under the common law of any jurisdiction or any
Environmental Law.

 

Section 6.13           Payment
of Taxes and Other Claims. 
The Borrower will pay or discharge, when due, (a) all taxes, assessments
and governmental charges levied or imposed upon it or upon its income or
profits, upon any properties belonging to it (including the Collateral) or upon
or against the creation, perfection or continuance of the Security Interest,
prior to the date on which penalties attach thereto, (b) all federal, state and
local taxes required to be withheld by it, and (c) all lawful claims for labor,
materials and supplies which, if unpaid, might by law become a Lien upon any
properties of the Borrower; provided, that the Borrower shall not be required
to pay any such tax, assessment, charge or claim whose amount, applicability or
validity is being contested in good faith by appropriate proceedings and for
which proper reserves have been made.

 

Section 6.14           Maintenance
of Properties.

 

(a)           The Borrower will keep and maintain the Collateral
and all of its other properties necessary or useful in its business in good
condition, repair and working order (normal wear and tear excepted) and will
from time to time replace or repair any worn, defective or broken parts; provided,
however, that nothing in this Section 6.14 shall prevent the Borrower
from discontinuing the operation and maintenance of any of its properties if
such discontinuance is, in the Borrower’s judgment, desirable in the conduct of
the Borrower’s business and not disadvantageous in any material respect to the
Lender.  The Borrower will take all
commercially reasonable steps necessary to protect and maintain its
Intellectual Property Rights.

 

(b)           The Borrower will defend the Collateral against all
Liens, claims or demands of all Persons (other than the Lender) claiming the
Collateral or any interest therein.  The
Borrower will keep all Collateral free and clear of all Liens except Permitted
Liens.  The Borrower will take all
commercially reasonable steps necessary to prosecute any Person Infringing its
Intellectual Property Rights and to defend itself against any Person accusing
it of Infringing any Person’s Intellectual Property Rights.

 

46

 

Section 6.15           Insurance.  The Borrower will obtain and at all times
maintain insurance with insurers acceptable to Lender, in such amounts, on such
terms (including any deductibles) and against such risks as may from time to
time be required by the Lender, but in all events in such amounts and against
such risks as is usually carried by companies engaged in similar business and
owning similar properties in the same general areas in which the Borrower
operates.  Without limiting the
generality of the foregoing, the Borrower will at all times maintain business
interruption insurance including coverage for force majeure and keep all
tangible Collateral insured against risks of fire (including so-called extended
coverage), theft, collision (for Collateral consisting of motor vehicles) and
such other risks and in such amounts as the Lender may reasonably request, with
any loss payable to the Lender to the extent of its interest, and all policies
of such insurance shall contain a lender’s loss payable endorsement for the
Lender’s benefit.  All policies of
liability insurance required hereunder shall name the Lender as an additional
insured.

 

Section 6.16           Preservation
of Existence.  The Borrower will
preserve and maintain its existence and all of its rights, privileges and
franchises necessary or desirable in the normal conduct of its business and
shall conduct its business in an orderly, efficient and regular manner.

 

Section 6.17           Delivery
of Instruments, etc. 
Upon request by the Lender, the Borrower will promptly deliver to the
Lender in pledge all instruments, documents and chattel paper constituting
Collateral, duly endorsed or assigned by the Borrower.

 

Section 6.18           Sale or Transfer of
Assets; Suspension of Business Operations.  The Borrower will not sell, lease, assign,
transfer or otherwise dispose of (i) the stock of any Subsidiary, (ii) all or a
substantial part of its assets, or (iii) any Collateral or any interest therein
(whether in one transaction or in a series of transactions) to any other Person
other than the sale of Inventory in the ordinary course of business and will
not liquidate, dissolve or suspend business operations.  The Borrower will not transfer any part of
its ownership interest in any Intellectual Property Rights and will not permit
any agreement under which it has licensed Licensed Intellectual Property to
lapse, except that the Borrower may transfer such rights or permit such
agreements to lapse if it shall have reasonably determined that the applicable
Intellectual Property Rights are no longer useful in its business.  If the Borrower transfers any Intellectual
Property Rights for value, the Borrower will pay over the proceeds to the
Lender for application to the Obligations. 
The Borrower will not license any other Person to use any of the
Borrower’s Intellectual Property Rights, except that the Borrower may grant
licenses in the ordinary course of its business in connection with sales of
Inventory or provision of services to its customers.

 

Section 6.19           Consolidation and
Merger; Asset Acquisitions. 
The Borrower will not consolidate with or merge into any Person, or
permit any other Person to merge into it, or acquire (in a transaction
analogous in purpose or effect to a consolidation or merger) all or substantially
all the assets of any other Person.

 

47

 

Section 6.20           Sale and
Leaseback.  The Borrower will not
enter into any arrangement, directly or indirectly, with any other Person
whereby the Borrower shall sell or transfer any real or personal property,
whether now owned or hereafter acquired, and then or thereafter rent or lease
as lessee such property or any part thereof or any other property which the
Borrower intends to use for substantially the same purpose or purposes as the
property being sold or transferred.

 

Section 6.21           Restrictions
on Nature of Business. 
The Borrower will not engage in any line of business materially
different from that presently engaged in by the Borrower and will not purchase,
lease or otherwise acquire assets not related to its business.  The Borrower will not store inventory or
engage in manufacturing or assembly activities at its Plymouth, Minnesota
facility or otherwise change the nature of the activities conducted at such
facility.

 

Section 6.22           Accounting.  The Borrower will not adopt any material
change in accounting principles other than as required by GAAP.  The Borrower will not adopt, permit or
consent to any change in its fiscal year.

 

Section 6.23           Discounts,
etc.  After notice from the Lender,
the Borrower will not grant any discount, credit or allowance to any customer
of the Borrower or accept any return of goods sold.  The Borrower will not at any time modify,
amend, subordinate, cancel or terminate the obligation of any account debtor or
other obligor of the Borrower.

 

Section 6.24           Plans.  Unless disclosed to the Lender pursuant to
Section 5.12, neither the Borrower nor any ERISA Affiliate will (i) adopt,
create, assume or become a party to any Pension Plan, (ii) incur any obligation
to contribute to any Multiemployer Plan, (iii) incur any obligation to provide
post-retirement medical or insurance benefits with respect to employees or
former employees (other than benefits required by law) or (iv) amend any Plan
in a manner that would materially increase its funding obligations.

 

Section 6.25           Place
of Business; Name.  The
Borrower will not transfer its chief executive office or principal place of
business, or move, relocate, close or sell any business location.  The Borrower will not permit any tangible
Collateral or any records pertaining to the Collateral to be located in any
state or area in which, in the event of such location, a financing statement
covering such Collateral would be required to be, but has not in fact been,
filed in order to perfect the Security Interest.  The Borrower will not change its name or
jurisdiction of organization.

 

Section 6.26           Constituent
Documents; S Corporation Status.  The Borrower will not amend its Constituent
Documents.  The Borrower will not become
an S corporation.

 

Section 6.27           Performance
by the Lender.  If the
Borrower at any time fails to perform or observe any of the foregoing covenants
contained in this Article VI or elsewhere herein, and if such failure shall
continue for a period of ten calendar days after the Lender gives the Borrower
written notice thereof (or in the case of the agreements contained in Section
6.13 and Section 6.15, immediately upon the occurrence of such failure, without
notice or lapse of time), the Lender may, but need not, perform or observe such
covenant on behalf and in the name, place

 

48

 

and stead of the Borrower (or, at the Lender’s option,
in the Lender’s name) and may, but need not, take any and all other actions
which the Lender may reasonably deem necessary to cure or correct such failure
(including the payment of taxes, the satisfaction of Liens, the performance of
obligations owed to account debtors or other obligors, the procurement and
maintenance of insurance, the execution of assignments, security agreements and
financing statements, and the endorsement of instruments); and the Borrower
shall thereupon pay to the Lender on demand the amount of all monies expended
and all costs and expenses (including reasonable attorneys’ fees and legal
expenses) incurred by the Lender in connection with or as a result of the
performance or observance of such agreements or the taking of such action by
the Lender, together with interest thereon from the date expended or incurred
at the Default Rate.  To facilitate the
Lender’s performance or observance of such covenants of the Borrower, the
Borrower hereby irrevocably appoints the Lender, or the Lender’s delegate,
acting alone, as the Borrower’s attorney in fact (which appointment is coupled
with an interest) with the right (but not the duty) from time to time to
create, prepare, complete, execute, deliver, endorse or file in the name and on
behalf of the Borrower any and all instruments, documents, assignments,
security agreements, financing statements, applications for insurance and other
agreements and writings required to be obtained, executed, delivered or
endorsed by the Borrower under this Section 6.27.

 

ARTICLE VII

 

EVENTS OF DEFAULT, RIGHTS
AND REMEDIES

 

Section 7.1             Events of
Default.  “Event of Default”,
wherever used herein, means any one of the following events:

 

(a)           Default in the payment of any Obligations when they
become due and payable;

 

(b)           Default in the performance, or breach, of any
covenant or agreement of the Borrower contained in this Agreement;

 

(c)           The existence of any Overadvance arising as the
result of any reduction in the Borrowing Base, or that arises in any manner and
on terms not otherwise approved of in advance by Lender;

 

(d)           A Change of Control shall occur;

 

(e)           Any Financial Covenant shall become inapplicable due
to the lapse of time and the failure to amend any such covenant to cover future
periods;

 

(f)            The Borrower shall be or become insolvent, or admit
in writing its or his inability to pay its or his debts as they mature, or make
an assignment for the benefit of creditors; or the Borrower shall apply for or
consent to the appointment of any receiver, trustee, or similar officer for it
or him or for all or any substantial part of its or his property; or such
receiver, trustee or similar officer shall be appointed without the application
or consent of the Borrower; or the Borrower shall institute (by petition,
application, answer, consent or otherwise) any bankruptcy, insolvency,
reorganization, arrangement, readjustment of debt, dissolution, liquidation or
similar proceeding relating to it or him under the laws of any jurisdiction; or
any such proceeding shall be instituted (by petition, application or otherwise)
against the Borrower; or any judgment, writ,

 

49

 

warrant of attachment or execution or similar process shall
be issued or levied against a substantial part of the property of the Borrower;

 

(g)           A petition shall be filed by or against the Borrower
under the United States Bankruptcy Code naming the Borrower as debtor;

 

(h)           The Life Insurance Policy shall be terminated, by
the Borrower or otherwise; or the Life Insurance Policy shall be scheduled to
terminate within 30 days and the Borrower shall not have delivered a renewal
thereof or substitute therefor to the Lender; or the Borrower shall fail to pay
any premium on the Life Insurance Policy when due or within any applicable cure
period; or the Borrower shall take any other action that impairs the value of
the Life Insurance Policy;

 

(i)            Any representation or warranty made by the Borrower
in this Agreement (including for purposes of this Section 7.1(i), the
representations and warranties set forth in Section 5.14 hereof made as though
none of them were limited to the Borrower’s knowledge) or by the Borrower (or
any of its Officers) in any agreement, certificate, instrument or financial
statement or other statement contemplated by or made or delivered pursuant to
or in connection with this Agreement shall prove to have been incorrect in any
material respect when deemed to be effective;

 

(j)            The rendering against the Borrower of an arbitration
award, final judgment, decree or order for the payment of money in excess of
$250,000.00 and the continuance of such arbitration award, judgment, decree or
order unsatisfied and in effect for any period of 30 consecutive days without a
stay of execution;

 

(k)           A default under any bond, debenture, note or other
evidence of material indebtedness of the Borrower owed to any Person other than
the Lender, or under any indenture or other instrument under which any such
evidence of indebtedness has been issued or by which it is governed, or under
any material lease or other contract, and the expiration of the applicable
period of grace, if any, specified in such evidence of indebtedness, indenture,
other instrument, lease or contract;

 

(l)            Any Reportable Event, which the Lender determines in
good faith might constitute grounds for the termination of any Pension Plan or
for the appointment by the appropriate United States District Court of a
trustee to administer any Pension Plan, shall have occurred and be continuing
30 days after written notice to such effect shall have been given to the
Borrower by the Lender; or a trustee shall have been appointed by an
appropriate United States District Court to administer any Pension Plan; or the
Pension Benefit Guaranty Corporation shall have instituted proceedings to
terminate any Pension Plan or to appoint a trustee to administer any Pension
Plan; or the Borrower or any ERISA Affiliate shall have filed for a distress
termination of any Pension Plan under Title IV of ERISA; or the Borrower or any
ERISA Affiliate shall have failed to make any quarterly contribution required
with respect to any Pension Plan under Section 412(m) of the IRC, which the
Lender determines in good faith may by itself, or in combination with any such
failures that the Lender may determine are likely to occur in the future,
result in the imposition of a Lien on the Borrower’s assets in favor of the
Pension Plan; or any withdrawal, partial withdrawal, reorganization or other
event occurs with

 

50

 

respect to a Multiemployer Plan which results or could
reasonably be expected to result in a material liability of the Borrower to the
Multiemployer Plan under Title IV of ERISA;

 

51

 

(m)          An event of default shall occur under any Security
Document;

 

(n)           The Borrower shall liquidate, dissolve, terminate or
suspend its business operations or otherwise fail to operate its business in
the ordinary course, merge with another organization unless Borrower is the
surviving entity; or sell or attempt to sell all or substantially all of its
assets, without the Lender’s prior written consent;

 

(o)           Default in the payment of any amount owed by the
Borrower to the Lender other than any indebtedness arising hereunder;

 

(p)           Any event or circumstance with respect to the
Borrower shall occur such that the Lender shall believe in good faith that the
prospect of payment of all or any part of the Obligations or the performance by
the Borrower under the Loan Documents is impaired or any material adverse
change in the business or financial condition of the Borrower shall occur; or

 

(q)           Any breach, default or event of default by or
attributable to any Affiliate under any agreement between such Affiliate and
the Lender shall occur.

 

(r)            The indictment of any Director, Officer or senior
manager of Borrower for a felony offence under state or federal law.

 

Section 7.2             Rights
and Remedies.  During
any Default Period, the Lender may exercise any or all of the following rights
and remedies:

 

(a)           The Lender may, by notice to the Borrower, declare
the Commitment to be terminated, whereupon the same shall forthwith terminate;

 

(b)           The Lender may, by notice to the Borrower, declare
the Obligations to be forthwith due and payable, whereupon all Obligations
shall become and be forthwith due and payable, without presentment, notice of
dishonor, protest or further notice of any kind, all of which the Borrower
hereby expressly waives;

 

(c)           The Lender may, without notice to the Borrower and
without further action, apply any and all money owing by the Lender to the
Borrower to the payment of the Obligations;

 

(d)           The Lender may exercise and enforce any and all
rights and remedies available upon default to a secured party under the UCC,
including the right to take possession of Collateral, or any evidence thereof,
proceeding without judicial process or by judicial process (without a prior
hearing or notice thereof, which the Borrower hereby expressly waives) and the
right to sell, lease or otherwise dispose of any or all of the Collateral (with
or without giving any warranties as to the Collateral, title to the Collateral
or similar warranties), and, in connection therewith, the Borrower will on
demand assemble the Collateral and make it available to the Lender at a place
to be designated by the Lender which is reasonably convenient to both parties;

 

52

 

(e)           The Lender may make demand upon the Borrower and,
forthwith upon such demand, the Borrower will pay to the Lender in immediately
available funds for deposit in the Special Account pursuant to Section 2.4 an
amount equal to the aggregate maximum amount available to be drawn under all
Letters of Credit then outstanding, assuming compliance with all conditions for
drawing thereunder;

 

(f)            The Lender may exercise and enforce its rights and
remedies under the Loan Documents; and

 

(g)           The Lender may without regard to any waste, adequacy of the security or
solvency of the Borrower, apply for the appointment of a receiver of the
Collateral, to which appointment the Borrower hereby consents, whether or not
foreclosure proceedings have been commenced under the Security Documents and
whether or not a foreclosure sale has occurred; and

 

(h)           The Lender may exercise any other rights and remedies available to it
by law or agreement.

 

Notwithstanding the foregoing, upon the occurrence of
an Event of Default described in Section 7.1(f) or (g), the Obligations shall
be immediately due and payable automatically without presentment, demand,
protest or notice of any kind.  If the
Lender sells any of the Collateral on credit, the Obligations will be reduced
only to the extent of payments actually received.  If the purchaser fails to pay for the
Collateral, the Lender may resell the Collateral and shall apply any proceeds
actually received to the Obligations.

 

Section 7.3             Certain
Notices.  If notice to
the Borrower of any intended disposition of Collateral or any other intended
action is required by law in a particular instance, such notice shall be deemed
commercially reasonable if given (in the manner specified in Section 8.3) at
least ten calendar days before the date of intended disposition or other
action.

 

ARTICLE VIII

 

MISCELLANEOUS

 

Section 8.1             No
Waiver; Cumulative Remedies; Compliance with Laws.  No failure or delay by the Lender in
exercising any right, power or remedy under the Loan Documents shall operate as
a waiver thereof; nor shall any single or partial exercise of any such right,
power or remedy preclude any other or further exercise thereof or the exercise
of any other right, power or remedy under the Loan Documents.  The remedies provided in the Loan Documents
are cumulative and not exclusive of any remedies provided by law.  The Lender may comply with any applicable
state or federal law requirements in connection with a disposition of the
Collateral and such compliance will not be considered adversely to affect the
commercial reasonableness of any sale of the Collateral.

 

53

 

Section 8.2             Amendments,
Etc.  No amendment, modification,
termination or waiver of any provision of any Loan Document or consent to any
departure by the Borrower therefrom or any release of a Security Interest shall
be effective unless the same shall be in writing and signed by the Lender, and
then such waiver or consent shall be effective only in the specific instance
and for the specific purpose for which given. 
No notice to or demand on the Borrower in any case shall entitle the
Borrower to any other or further notice or demand in similar or other
circumstances.

 

Section 8.3             Notices;
Communication of Confidential Information; Requests for
Accounting.  Except as otherwise
expressly provided herein, all notices, requests, demands and other
communications provided for under the Loan Documents shall be in writing and
shall be (a) personally delivered, (b) sent by first class United States mail,
(c) sent by overnight courier of national reputation, (d) transmitted by
telecopy, or (e) sent as electronic mail, in each case delivered or sent to the
party to whom notice is being given to the business address, telecopier number,
or e mail address set forth below next to its signature or, as to each party,
at such other business address, telecopier number, or e mail address as it may
hereafter designate in writing to the other party pursuant to the terms of this
Section.  All such notices, requests,
demands and other communications shall be deemed to be an authenticated record
communicated or given on (a) the date received if personally delivered, (b) when
deposited in the mail if delivered by mail, (c) the date delivered to the
courier if delivered by overnight courier, or (d) the date of transmission if
sent by telecopy or by e mail, except that notices or requests delivered to the
Lender pursuant to any of the provisions of Article II of this Agreement shall
not be effective until received by the Lender. 
All notices, financial information, or other business records sent by
either party to this Agreement may be transmitted, sent, or otherwise
communicated via such medium as the sending party may deem appropriate and
commercially reasonable; provided, however, that the risk that the
confidentiality or privacy of such notices, financial information, or other
business records sent by the Borrower may be compromised shall be borne
exclusively by the Borrower.  All
requests for an accounting under Section 9-210 of the UCC (i) shall be made in
a writing signed by a Person authorized under Section 2.2(a), (ii) shall be
personally delivered, sent by registered or certified mail, return receipt
requested, or by overnight courier of national reputation, (iii) shall be
deemed to be sent when received by the Lender and (iv) shall otherwise comply
with the requirements of Section 9-210. 
The Borrower requests that the Lender respond to all such requests which
on their face appear to come from an authorized individual and releases the
Lender from any liability for so responding. 
The Borrower shall pay the Lender the maximum amount allowed by law for
responding to such requests.

 

Section 8.4             Further
Documents.  The
Borrower will from time to time execute, deliver, endorse and authorize the
filing of any and all instruments, documents, conveyances, assignments,
security agreements, financing statements, control agreements and other
agreements and writings that the Lender may reasonably request in order to
secure, protect, perfect or enforce the Security Interest or the Lender’s
rights under the Loan Documents (but any failure to request or assure that the
Borrower executes, delivers, endorses or authorizes the filing of any such item
shall not affect or impair the validity, sufficiency or enforceability of the
Loan Documents and the Security Interest, regardless of whether any such item
was or was not executed, delivered or endorsed in a similar context or on a prior
occasion).

 

54

 

Section 8.5             Costs
and Expenses.  The
Borrower shall pay on demand all costs and expenses, including reasonable
attorneys’ fees, incurred by the Lender in connection with the Obligations, this
Agreement, the Loan Documents, any Letter of Credit and any other document or
agreement related hereto or thereto, and the transactions contemplated hereby,
including all such costs, expenses and fees incurred in connection with the
negotiation, preparation, execution, amendment, administration, performance,
collection and enforcement of the Obligations and all such documents and
agreements and the creation, perfection, protection, satisfaction, foreclosure
or enforcement of the Security Interest.

 

Section 8.6             Indemnity.  In addition to the payment of expenses
pursuant to Section 8.5, the Borrower shall indemnify, defend and hold
harmless the Lender, and any of its participants, parent corporations,
subsidiary corporations, affiliated corporations, successor corporations, and
all present and future officers, directors, employees, attorneys and agents of
the foregoing (the “Indemnitees”) from and against any of the following
(collectively, “Indemnified Liabilities”):

 

(a)           Any and all transfer taxes, documentary taxes,
assessments or charges made by any governmental authority by reason of the
execution and delivery of the Loan Documents or the making of the Advances;

 

(b)           Any claims, loss or damage to which any Indemnitee
may be subjected if any representation or warranty contained in Section 5.14
proves to be incorrect in any respect or as a result of any violation of the
covenant contained in Section 6.12(b) ; and

 

(c)           Any and all other liabilities, losses, damages, penalties, judgments,
suits, claims, costs and expenses of any kind or nature whatsoever (including
the reasonable fees and disbursements of counsel) in connection with the
foregoing and any other investigative, administrative or judicial proceedings,
whether or not such Indemnitee shall be designated a party thereto, which may
be imposed on, incurred by or asserted against any such Indemnitee, in any
manner related to or arising out of or in connection with the making of the
Advances and the Loan Documents or the use or intended use of the proceeds of
the Advances.

 

If any investigative, judicial or administrative
proceeding arising from any of the foregoing is brought against any Indemnitee,
upon such Indemnitee’s request, the Borrower, or counsel designated by the
Borrower and satisfactory to the Indemnitee, will resist and defend such
action, suit or proceeding to the extent and in the manner directed by the
Indemnitee, at the Borrower’s sole costs and expense.  Each Indemnitee will use its best efforts to
cooperate in the defense of any such action, suit or proceeding.  If the foregoing undertaking to indemnify,
defend and hold harmless may be held to be unenforceable because it violates
any law or public policy, the Borrower shall nevertheless make the maximum
contribution to the payment and satisfaction of each of the Indemnified
Liabilities which is permissible under applicable law.  The Borrower’s obligation under this Section
8.6 shall survive the termination of this Agreement and the discharge of the
Borrower’s other obligations hereunder.

 

55

 

Section 8.7             Participants.  The Lender and its participants, if any, are
not partners or joint venturers, and the Lender shall not have any liability or
responsibility for any obligation, act or omission of any of its
participants.  All rights and powers
specifically conferred upon the Lender may be transferred or delegated to any
of the Lender’s participants, successors or assigns.

 

Section 8.8             Execution
in Counterparts; Telefacsimile Execution.  This Agreement and other Loan Documents may
be executed in any number of counterparts, each of which when so executed and
delivered shall be deemed to be an original and all of which counterparts,
taken together, shall constitute but one and the same instrument.  Delivery of an executed counterpart of this
Agreement by telefacsimile shall be equally as effective as delivery of an
original executed counterpart of this Agreement.  Any party delivering an executed counterpart
of this Agreement by telefacsimile also shall deliver an original executed
counterpart of this Agreement but the failure to deliver an original executed
counterpart shall not affect the validity, enforceability, and binding effect
of this Agreement.

 

Section 8.9             Retention
of Borrower’s Records. 
The Lender shall have no obligation to maintain any electronic records
or any documents, schedules, invoices, agings, or other papers delivered to the
Lender by the Borrower or in connection with the Loan Documents for more than
30 days after receipt by the Lender.  If
there is a special need to retain specific records, Borrower must inform Lender
of its need to retain those records with particularity, which must be delivered
in accordance with the notice provisions of Section 8.3 of this Agreement
within 30 days of Lender taking control of same.

 

Section 8.10           Binding
Effect; Assignment; Complete Agreement; Sharing Information.  The Loan Documents shall be binding upon and
inure to the benefit of the Borrower and the Lender and their respective
successors and assigns, except that the Borrower shall not have the right to
assign its rights thereunder or any interest therein without the Lender’s prior
written consent.  To the extent permitted
by law, the Borrower waives and will not assert against any assignee any
claims, defenses or set-offs which the Borrower could assert against the
Lender.  This Agreement shall also bind
all Persons who become a party to this Agreement as a borrower.  This Agreement, together with the Loan
Documents, comprises the complete and integrated agreement of the parties on
the subject matter hereof and supersedes all prior agreements, written or oral,
on the subject matter hereof.  To the
extent that any provision of this Agreement contradicts other provisions of the
Loan Documents, this Agreement shall control. Without limiting the Lender’s
right to share information regarding the Borrower and its Affiliates with the
Lender’s participants, accountants, lawyers and other advisors, the Lender and
Wells Fargo Bank may share any and all information they may have in their
possession regarding the Borrower and its Affiliates, and the Borrower waives
any right of confidentiality it may have with respect to such sharing of
information.

 

Section 8.11           Severability
of Provisions.  Any provision of this
Agreement which is prohibited or unenforceable shall be ineffective to the
extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof.

 

56

 

Section 8.12           Headings.  Article, Section and subsection headings in
this Agreement are included herein for convenience of reference only and shall
not constitute a part of this Agreement for any other purpose.

 

Section 8.13           Governing
Law; Jurisdiction, Venue; Waiver of Jury Trial.  The Loan Documents shall be governed by and
construed in accordance with the substantive laws (other than conflict laws) of
the State of Minnesota.  The parties
hereto hereby (i) consent 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; (ii) waive any argument that venue in any such forum
is not convenient; (iii) agree that any litigation initiated by the Lender or
the Borrower in connection with this Agreement or the other Loan Documents may
be venued in either the state or federal courts located in the City of
Minneapolis, County of Hennepin, State of Minnesota; and (iv) agree that a
final judgment in any such suit, action or proceeding shall be conclusive and
may be enforced in other jurisdictions by suit on the judgment or in any other
manner provided by law.

 

 

	
  THE BORROWER AND LENDER WAIVE ANY
  RIGHT TO TRIAL BY JURY IN ANY ACTION AT LAW OR IN EQUITY OR IN ANY OTHER
  PROCEEDING BASED ON OR PERTAINING TO THIS AGREEMENT OR ANY OTHER LOAN
  DOCUMENT .

  
	
   

  
	
  Borrower’s Initials

  	
   

  	
   

  	
  Lender’s Initials

  	
   

  	
   

  

 

 

[Remainder of page intentionally left blank; signature page follows]

 

57

 

IN WITNESS WHEREOF, the parties hereto have caused
this Agreement to be executed by their respective officers thereunto duly
authorized as of the date first above written.

 

	
  Waters Instruments, Inc.

  	
   

  	
  WATERS INSTRUMENTS, INC.

  
	
  13705 26th Avenue North

  	
   

  	
   

  	
   

  
	
  Minneapolis, MN 55441

  	
   

  	
  By:

  	
  /s/ Gerald W. Grabowski

  
	
   

  	
   

  	
   

  	
   

  
	
  Telecopier:
  763-509-7450

  	
   

  	
  Its: 

  	
  President

  
	
  Attention: Gregg
  A. Anshus

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Wells Fargo Business Credit, Inc.

  	
   

  	
  WELLS FARGO BUSINESS CREDIT,

  
	
  MAC N9312-040

  	
   

  	
  INC.

  
	
  Sixth and Marquette

  	
   

  	
   

  	
   

  
	
  Minneapolis, MN 55479

  	
   

  	
  By: 

  	
  /s/ Brian J. Waldinger

  
	
   

  	
   

  	
   

  	
   

  
	
  Telecopier: 612-341-2472

  	
   

  	
  Its: 

  	
  Vice President

  
	
  Attention: Brian J. Waldinger

  	
   

  	
   

  	
   

  
	
  E-mail: Brian J.
  Waldinger@wellsfargo.com

  	
   

  	
   

  	
   

  

 

 

TABLE OF EXHIBITS AND SCHEDULES

 

	
  Exhibit A

  	
  Form of
  Revolving Note

  
	
   

  	
   

  
	
  Exhibit B

  	
  Form of
  Equipment Term Note

  
	
   

  	
   

  
	
  Exhibit C

  	
  Form of Real
  Estate Term Note

  
	
   

  	
   

  
	
  Exhibit D

  	
  Compliance
  Certificate

  
	
   

  	
   

  
	
  Exhibit E

  	
  Premises

  
	
   

  	
   

  
	
  Exhibit F

  	
  Form of
  Notice of Borrowing

  
	
   

  	
   

  
	
  Schedule 2.3

  	
  Letters of
  Credit

  
	
   

  	
   

  
	
  Schedule 5.1

  	
  Trade Names,
  Chief Executive Office, Principal Place of Business, and Locations of
  Collateral

  
	
   

  	
   

  
	
  Schedule 5.2

  	
  Capitalization
  and Organizational Chart

  
	
   

  	
   

  
	
  Schedule 5.5

  	
  Subsidiaries

  
	
   

  	
   

  
	
  Schedule 5.7

  	
  Litigation
  Matters in Excess of $250,000.00

  
	
   

  	
   

  
	
  Schedule
  5.11

  	
  Intellectual
  Property Disclosures

  
	
   

  	
   

  
	
  Schedule
  5.14

  	
  Environmental
  Matters

  
	
   

  	
   

  
	
  Schedule 6.3

  	
  Permitted
  Liens

  
	
   

  	
   

  
	
  Schedule 6.4

  	
  Permitted
  Indebtedness and Guaranties

  

 

 

REVOLVING NOTE

 

	
  $6,000,000.00

  	
  September 7, 2004

  

 

For value received, the undersigned, WATERS
INSTRUMENTS, INC., a Minnesota corporation (the “Borrower”), hereby promises to
pay on the Termination Date under the Credit Agreement (defined below), to the
order of WELLS FARGO BUSINESS CREDIT, INC., a Minnesota corporation (the “Lender”),
at its office in Minneapolis, Minnesota, or at any other place designated at
any time by the holder hereof, in lawful money of the United States of America
and in immediately available funds, the principal sum of Six Million and 00/100
Dollars ($6,000,000.00) or the aggregate unpaid principal amount of all
Revolving Advances made by the Lender to the Borrower under the Credit
Agreement (defined below) together with interest on the principal amount
hereunder remaining unpaid from time to time, computed on the basis of the
actual number of days elapsed and a 360-day year, from the date hereof until
this Note is fully paid at the rate from time to time in effect under the
Credit and Security Agreement dated the same date as this Note (the “Credit
Agreement”) by and between the Lender and the Borrower.  The principal hereof and interest accruing
thereon shall be due and payable as provided in the Credit Agreement.  This Note may be prepaid only in accordance
with the Credit Agreement.

 

This Note is issued pursuant, and is subject, to the
Credit Agreement, which provides, among other things, for acceleration
hereof.  This Note is the Revolving Note
referred to in the Credit Agreement. 
This Note is secured, among other things, pursuant to the Credit
Agreement and the Security Documents as therein defined, and may now or hereafter
be secured by one or more other security agreements, mortgages, deeds of trust,
assignments or other instruments or agreements.

 

The Borrower shall pay all costs of collection,
including reasonable attorneys’ fees and legal expenses if this Note is not
paid when due, whether or not legal proceedings are commenced.

 

Presentment or other demand for payment, notice of
dishonor and protest are expressly waived.

 

 

 

[Remainder of page intentionally left blank; signature
page follows]

 

 

	
   

  	
  WATERS INSTRUMENTS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Gerald W. Grabowski

  	
   

  
	
   

  	
  Name:

  	
  Gerald W. Grabowski

  
	
   

  	
  Its:

  	
  President

  
					

 

 

EQUIPMENT TERM NOTE

 

	
  $500,000.00

  	
   

  	
  September 7, 2004

  

 

For value received, the undersigned, WATERS
INSTRUMENTS, INC., a Minnesota corporation (the “Borrower”), hereby promises to
pay on the Termination Date under the Credit Agreement (defined below), to the
order of Wells Fargo Business Credit, Inc., a Minnesota corporation (the “Lender”),
at its office in Minneapolis, Minnesota, or at any other place designated at any
time by the holder hereof, in lawful money of the United States of America and
in immediately available funds, the principal sum of Five Hundred Thousand and
00/100 Dollars ($500,000.00) or the aggregate unpaid principal amount of all
Term Advances made by the Lender to the Borrower under the Credit Agreement
(defined below) together with interest on the principal amount hereunder
remaining unpaid from time to time, computed on the basis of the actual number
of days elapsed and a 360-day year, from the date hereof until this Note is
fully paid at the rate from time to time in effect under the Credit and
Security Agreement dated the same date as this Note (as the same may hereafter
be amended, supplemented or restated from time to time, the “Credit Agreement”)
by and between the Lender and the Borrower. 
The principal hereof and interest accruing thereon shall be due and
payable as provided in the Credit Agreement. 
This Note may be prepaid only in accordance with the Credit Agreement.

 

This Note is issued pursuant, and is subject, to the
Credit Agreement, which provides, among other things, for acceleration
hereof.  This Note is the Equipment Term
Note referred to in the Credit Agreement.

 

This Note is secured, among other things, pursuant to
the Credit Agreement and the Security Documents as therein defined, and may now
or hereafter be secured by one or more other security agreements, mortgages,
deeds of trust, assignments or other instruments or agreements.

 

The Borrower hereby agrees to pay all costs of collection,
including reasonable attorneys’ fees and legal expenses in the event this Note
is not paid when due, whether or not legal proceedings are commenced.

 

Presentment or other demand for payment, notice of
dishonor and protest are expressly waived.

 

 

[Remainder of page intentionally left blank; signature
page follows]

 

 

	
   

  	
  WATERS INSTRUMENTS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Gerald W. Grabowski

  	
   

  
	
   

  	
  Name:

  	
  Gerald W. Grabowski

  
	
   

  	
  Its:

  	
  President

  
					

 

 

REAL ESTATE TERM NOTE

 

	
  $1,300,000.00

  	
  September 7, 2004

  

 

For value received, the undersigned, WATERS
INSTRUMENTS, INC., a Minnesota corporation (the “Borrower”), hereby promises to
pay on the Termination Date under the Credit Agreement (defined below), to the
order of Wells Fargo Business Credit, Inc., a Minnesota corporation (the “Lender”),
at its office in Minneapolis, Minnesota, or at any other place designated at
any time by the holder hereof, in lawful money of the United States of America
and in immediately available funds, the principal sum of One Million Three
Hundred Thousand and 00/100 Dollars ($1,300,000.00) or the aggregate unpaid
principal amount of all Term Advances made by the Lender to the Borrower under
the Credit Agreement (defined below) together with interest on the principal
amount hereunder remaining unpaid from time to time, computed on the basis of
the actual number of days elapsed and a 360-day year, from the date hereof
until this Note is fully paid at the rate from time to time in effect under the
Credit and Security Agreement dated the same date as this Note (as the same may
hereafter be amended, supplemented or restated from time to time, the “Credit
Agreement”) by and between the Lender and the Borrower.  The principal hereof and interest accruing
thereon shall be due and payable as provided in the Credit Agreement.  This Note may be prepaid only in accordance
with the Credit Agreement.

 

This Note is issued pursuant, and is subject, to the
Credit Agreement, which provides, among other things, for acceleration
hereof.  This Note is the Real Estate Term
Note referred to in the Credit Agreement.

 

This Note is secured, among other things, pursuant to
the Credit Agreement and the Security Documents as therein defined, and may now
or hereafter be secured by one or more other security agreements, mortgages,
deeds of trust, assignments or other instruments or agreements.

 

The Borrower hereby agrees to pay all costs of
collection, including reasonable attorneys’ fees and legal expenses in the
event this Note is not paid when due, whether or not legal proceedings are
commenced.

 

Presentment or other demand for payment, notice of
dishonor and protest are expressly waived.

 

 

[Remainder of page intentionally left blank; signature
page follows]

 

 

	
   

  	
  WATERS INSTRUMENTS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Gerald W. Grabowski

  	
   

  
	
   

  	
  Name:

  	
  Gerald W. Grabowski

  
	
   

  	
  Its:

  	
  PresidentExhibit 10.2

 

 

FACILITY
LETTER

 

BANK
OF SCOTLAND

 

 

funding
of

 

£2,214,000

 

to

 

ZAREBA
SYSTEMS EUROPE LIMITED

 

 

	
  

  	
   

  	
  Bank of Scotland
3 Queen Street

  Norwich NR2 4SG

  
	
   

  	
   

  	
  For
  the attention of Kellie Woodard

  
	
  Zareba
  Systems Europe Limited

  (Company Number 5176793)

  c/o Mills & Reeve

  1 St James Court

  Whitefriars

  Norwich NR3 1RU

  	
   

  	
  Telephone:       01603
  242013

  Fax:                  01603
  242004

  

 

27
September 2004

 

Dear
Sirs,

 

TERM LOAN OF £ 2,214,000

 

We
are pleased to offer Zareba Systems Europe Limited (the “Borrower”) a term loan
of £2,214,000 (the “Term Loan”).  This
offer is open for acceptance by the Borrower until 30 September 2004, when it
will lapse.  If accepted, this letter and
its schedules will form the agreement between the Borrower and BoS for the Term Loan.

 

The
definitions which shall apply to this letter are given in Schedules 4 and 9.

 

1.                                      Conditions Precedent

 

The Term Loan
will not be available until BoS has
received, in form and substance satisfactory to it, the documents and evidence
detailed in  Schedule 1.

 

2.                                      The Term Loan

 

2.1.                            Purpose

 

The Borrower
may only use the Term Loan for the Specified Purpose.

 

2.2.                            Drawdown

 

2.2.1.                     Subject to clause 2.2.2 below, the Borrower may draw the Term Loan
in multiple amounts as follows:-

 

(i)                                                                                     the first such drawdown (“First Drawdown”) shall be for £1,330,000
and shall be made on the date hereof;

 

(ii)                                                                                  the second such drawdown shall be for £585,000 and shall be made no
earlier than 1 month, and no later than 2 months, from the date of First
Drawdown;

 

(iii)                                                                               the third such drawdown shall be for £299,000 and shall be made no
earlier than 6 months, and no later than 8 months, from the date of First
Drawdown.

 

.  In each case a Notice of Drawdown must be
given by the Borrower no later than 11 am on the proposed date of drawdown
(which must be a Business Day).

 

2.2.2.                     The Term Loan may not be drawn down if any Default has occurred or
would result from drawdown.

 

 

2.3.                            Repayment

 

2.3.1                        The Term Loan shall (subject to the other provisions of this letter
and, in particular, clause 2.4.2) be repaid by 52 consecutive monthly
instalments of capital and interest which will be debited to the Borrower’s
servicing account on the last Business Day of each calendar month in each
calendar year (each a “Repayment Date”), the first repayment date being the
last Business Day of the month which is the earlier of (a) the eighth month
after the month in which First Drawdown takes place and (b) the month in which
the total amount drawn down under the Term Loan is £2,214,000. .

 

2.3.2                        Any amounts repaid or prepaid in respect of the Term Loan may not be
redrawn.

 

2.4.                            Interest

 

2.4.1.                     The Borrower will pay interest on the Term Loan at the annual rate
which is the sum of (1) the Margin and (2) BoS Base Rate.

 

2.4.2.                     Interest will be calculated on a day to day basis on the outstanding
amount of the Term Loan and will be debited to the Borrower’s servicing account
on the last Business Day of each month, commencing with the month in which
First Drawdown takes place.

 

2.5.                            Voluntary Prepayment

 

Subject to
compliance with the terms of clause 2.7, the Borrower may elect to prepay all
or part of the Term Loan provided that it has given BoS
at least 3 Business Days’ notice in writing of its intention to prepay.

 

2.6                               Mandatory Prepayment

 

The Borrower
will prepay the Term Loan on the occurrence of any of:-

 

2.6.1                        a Sale;

 

2.6.2                        a Listing;

 

2.6.3                        a Change of Control.

 

The
terms of clause 2.7 shall apply to any prepayment under this clause 2.6.

 

2.7                               Prepayment

 

2.7.1                        Any notice of prepayment under this letter shall be irrevocable.

 

2.7.2                        Any prepayment under this letter shall be of an amount not less than
£10,000 and an integral multiple of £10,000 (or the balance of the Term Loan)
and shall be made together with accrued interest on the amount prepaid, Break
Costs and any other amounts payable to BoS under this
letter.

 

2.7.3                        Any prepayment under this letter may be paid without payment of any
fee or penalty provided that BoS is paid, by
way of compensation for lost return on early repayment, an amount equal to half
of one per cent (0.5%) of the amount prepaid if the prepayment is made pursuant
to, in contemplation of or otherwise in connection with a Sale, Listing or a
Change of Control or a refinancing of all or any part of the Term Loan by any
person other than BoS and/or if
the prepayment is made within 2 years of the date of this letter. No

 

2

 

such amount
will be payable in the event of a prepayment which requires to be made pursuant
to the terms of clause 11.

 

2.7.4                        Any prepayment under this letter shall be applied in pro rata
reduction of each remaining scheduled repayment instalment.

 

2.7.5                        The Borrower may not repay or prepay all or any part of the Term
Loan except at the times and in the manner provided for in this letter.

 

3.                                      Hedging

 

3.1.                              The Borrower may (but will be under no obligation to do so), after
consultation with BoS, enter into
such interest rate protection agreements or foreign currency transactions (with
Treasury in the form of the Treasury ISDA Documents) regarding its exposure to
interest rates or foreign exchange rates as the Borrower and BoS may agree from time to time.  Any fee or premium payable to BoS or to any other person in connection with such
arrangements shall be payable by the Borrower on demand and the Borrower hereby
indemnifies BoS (and any member of the BoS Group) against all and any liabilities, losses, damages,
costs and other amounts which may arise out of or in connection with such
arrangements (including, without limitation, the termination or closing out of
such arrangements) save to the extent resulting from the gross negligence or
wilful default of BoS (or any
member of the BoS Group).

 

3.2.                              In consideration of (1) Treasury (now or in the future) entering into
any of the arrangements contemplated in clause 3.1 above with the Borrower and
(2) BoS entering into the Treasury
Guarantee, the Borrower indemnifies BoS against the
Treasury Indemnified Events.  In
addition, the Borrower:-

 

3.2.1.                     authorises BoS to make any
payments and comply with any demands made under the Treasury Guarantee without
further authority from the Borrower and agrees that any such payment shall be
binding on the Borrower without further evidence from BoS
of its liability to make such payment to Treasury;

 

3.2.2.                     undertakes to pay to BoS on demand
an amount equal to each amount demanded under the Treasury Guarantee and
authorises BoS to debit any of the Borrower’s
accounts with such sums; and

 

3.2.3.                     agrees that this indemnity shall be a continuing security until such
time as all liabilities, claims, damages, costs and expenses incurred or
sustained by the Borrower under this indemnity have been paid or discharged in
full.

 

4.                                      Default Interest

 

4.1.                              If the Borrower fails to pay any sum under or in relation to the
Term Loan on its due date then the Borrower will pay interest on it at the
Default Rate until it is paid.

 

4.2.                              Default interest payable must be paid monthly in arrear and if not
paid will itself bear interest at the Default Rate.

 

5.                                      Security

 

5.1.                              The Borrower will, as security for the Term Loan and any other money
owing or incurred to BoS by any
Group Company deliver or procure delivery of the Security Documents detailed in
Schedule 1.

 

5.2.                              The Borrower will enter into such further Security Documents in
favour of BoS as BoS
may require from time to time and will procure that each Group Company will
enter into such Security Documents in favour of BoS
as it shall notify to the Borrower from time to time and all such Security
Documents will secure the Term Loan and any other money due, owing or incurred
to BoS by any Group Company.

 

3

 

6.                                      Representations and
Warranties

 

The Borrower
by signing this letter makes the representations and warranties set out in
Schedule 2 on the date hereof and repeats each of them (save for warranties
numbered 7, 8, 10, 11, 12 and 20) on each Repayment Date.

 

7.                                      Covenants

 

The Borrower
covenants with BoS that from the date of its
acceptance of this letter until all the Borrower’s obligations under it have
been discharged:-

 

7.1.                            General Covenants

 

The Borrower
will at all times comply and procure compliance by each Group Company with the
general covenants set out in Schedule 3.

 

7.2.                            Financial Covenants

 

The Borrower
will at all times comply with the financial covenants set out in Schedule 4.

 

7.3.                            Financial Information
Covenants

 

The Borrower
will at all times comply with the financial information covenants set out in
Schedule 5.

 

8.                                      Default and Indemnity

 

8.1.                              If an Event of Default occurs and has not been waived by BoS in writing, BoS may by
notice in writing to the Borrower:-

 

8.1.1.                     declare that all or part of the Term Loan is due and payable
together with accrued interest and all other amounts outstanding under the BoS Documents; and/or

 

8.1.2.                     cancel any part of the Term Loan then undrawn; and/or

 

8.1.3.                     require repayment (immediately or otherwise as BoS
may require) of the Term Loan together with accrued interest and all other
amounts outstanding under the BoS Documents;
and/or

 

8.1.4.                     require that interest is payable on the Term Loan at the Default
Rate.

 

8.2.                              The Borrower will indemnify (and keep indemnified) BoS on written demand against any loss or expense, including
legal fees, which BoS sustains or
incurs:-

 

8.2.1.                     because of a default by any Group Company of any obligation assumed
by it under any BoS Document; or

 

8.2.2.                     as a consequence of any Default.

 

8.3.                              If a Default occurs then (while it is continuing unwaived) BoS shall be entitled to initiate an investigation of,
and/or instruct any report (accounting, legal, valuation or otherwise) on, the
business and affairs of the Borrower and/or any other Group Company which BoS considers necessary to ascertain the financial position
of the Group, all fees and expenses incurred by BoS
in so doing being payable by the Borrower.

 

4

 

9.                                      Taxes, Increased Cost
and Market Disruption

 

9.1.                              All payments by the Borrower to BoS (being a
Qualifying Lender) under this letter shall be free and without deduction of tax
unless the Borrower is required by law to make a payment subject to deduction
or withholding of tax, in which case the amount payable by the Borrower will be
sufficiently increased to ensure that BoS receives and
retains a net sum equal to that which it would have received and retained were
no deduction or withholding made.  If BoS subsequently receives a tax credit which is referable to
the increased payment and which enhances its position , then it will reimburse
the Borrower sufficient to redress the position up to the amount received so
long as by so doing it does not prejudice receipt or retention of the tax
credit.

 

9.2.                              If BoS incurs an Increased Cost, then
the Borrower will indemnify it and will promptly pay to it the amount BoS certifies as payable. 
BoS will disclose, in reasonable
detail, the basis of its calculation but not any matter which it considers
confidential.

 

10.                               Payment, Set Off and
Interest Calculations

 

10.1.                        All payments of principal, interest or commission will be paid to BoS at the Borrower’s branch unless BoS
otherwise directs and shall be in cleared Sterling funds.  If BoS receives a
payment that is insufficient to discharge all the amounts then due and payable
under the BoS Documents, BoS
shall apply that payment towards the obligations of the Group Companies under
the BoS Documents in such order as BoS considers appropriate and any such appropriation shall
override any instructions by any Group Company.

 

10.2.                        All payments to be made by any Group Company under the BoS Documents shall be calculated and be made without (and
free and clear of any deduction for) set-off or counterclaim.

 

10.3.                        All sums of interest or commission will accrue on a daily basis and
be calculated on the basis of a year of 365 days and for the actual number of
days elapsed.  Interest shall continue to
accrue on sums due following decree or judgement as well as before it, and at
the same rate.

 

10.4.                        Any determination by BoS of any
amount of principal, interest, commission or charges or an applicable interest
rate shall, in the absence of manifest error, be conclusive and binding on the
Borrower.

 

10.5.                        Where the due date for payment of any amount under any BoS Document is not a Business Day then (without affecting subsequent
payment dates) actual payment will be required on the next Business Day.

 

10.6.                        The Borrower agrees that any monies from time to time standing to
its credit on any account (whether current, deposit, loan or of any other
nature whatsoever) with BoS may be
retained as cover for and/or applied by BoS at any time
and without notice to the Borrower (whether on or before or after the expiry of
any fixed or minimum period for which such monies may have been deposited) in
or towards payment or satisfaction of any monies or liabilities due, owing or
incurred by the Borrower to BoS in any
manner, whether present or future, actual or contingent, joint or several,
whether incurred as principal or surety (or guarantor or cautioner) or in any
other way whatsoever.

 

10.7.                        If BoS exercises any rights in
respect of any monies as referred to in clause 10.6 (including, without
limitation, any rights of set-off, accounting, retention or similar rights) in
relation to any liability of the Borrower and that liability or any part of it
is in a different currency from any credit balance against which BoS seeks to exercise its rights, BoS
may use the currency of the credit balance to purchase an amount in the
currency of the liability at the then prevailing BoS
spot rate of exchange and to pay

 

5

 

out of the
credit balance all costs, charges and expenses incurred by BoS
in connection with that purchase.

 

10.8.                        BoS shall not be
liable for any loss of interest caused by the determination before maturity of
any deposits or any loss caused by the fluctuation in any exchange rate at
which any currency may be bought or sold by BoS.

 

10.9.                        If the Borrower fails to pay any amount due to BoS
in Sterling but makes such payment in another currency, the Borrower shall
indemnify BoS against the full cost incurred by BoS (including all costs, charges and expenses) of
converting that payment into Sterling.

 

10.10.                  In the event that (1) any currency in which any of the obligations
under the BoS Documents are denominated from time
to time is changed or replaced at any time after the date of this letter
(whether as a result of the introduction of, changeover to or operation of a
single or unified European currency or otherwise) and/or (2) any price source
for the Euro or the national currency of any member state of the European Union
disappears or is replaced and/or (3) any market conventions relating to the
fixing and/or calculation of interest are changed or replaced, the BoS Documents will be amended to the extent that BoS (acting reasonably) considers to be required in order to
reflect those circumstances.

 

11.                               Illegality

 

If, in the
opinion of BoS, the introduction of any law
or regulation or change in its interpretation, makes it unlawful for BoS to maintain all or any part of the Term Loan or carry
out all or any of its obligations in relation to it then BoS
will serve notice to that effect on the Borrower and that notice will release BoS from those obligations. 
The Borrower will then repay to BoS (on its
demand or on such later date BoS as
reasonably specifies) the Term Loan together with any other sums payable to as BoS under this letter.

 

12.                               Assignment and
Transfer

 

12.1.                        This letter is for the benefit of the Borrower and BoS and their successors and assignees and transferees of BoS.

 

12.2.                        The Borrower may not assign or transfer all or any of its rights,
obligations or benefits under this letter.

 

12.3.                        BoS will be entitled
(after consultation with the Borrower) to (1) assign any of its rights and/or
(2) transfer by novation any of its rights, benefits and obligations under the BoS Documents to another bank or financial institution or a
trust, fund or other entity which is regularly engaged in or established for
the purpose of making, purchasing or investing in loans, securities or other
financial assets.  The Borrower
undertakes to execute and to procure that each Group Company will execute all
documents BoS may reasonably require to give
effect to an assignment , novation or transfer.

 

12.4.                        BoS will be entitled
to enter into any sub-participation, or any trust or contractual arrangement
(or any other transaction under which payments are to be made by reference to
the BoS Documents, the Borrower or any
Group Company) with any person in relation to the BoS
Documents and (subject to clause 12.5 below) to provide information in relation
to the Group to such persons for such purpose.

 

12.5.                        BoS will be entitled
to disclose to any prospective or actual assignee, transferee or participant,
any other member of the BoS Group, its
auditors, advisers or applicable regulatory authority or any other person who
enters or proposes to enter into any transaction as referred to in Clause 12. 4
above with BoS in relation to the BoS Documents confidential information concerning each Group
Company and its

 

6

 

financial
condition and any other information which may be given to BoS
in relation to this letter, provided that the person to whom such information
is disclosed undertakes to BoS to maintain
the confidentiality of such information.

 

13.                               Notices

 

13.1.                        Any communication to be made under or in connection with this letter
shall be made in writing and, unless otherwise stated, may be made by fax or
letter.

 

13.2.                        The address and fax number (and the department or officer, if any,
for whose attention the communication is to be made) of BoS for
any communication or document to be made or delivered under or in connection
with this letter is that identified with its name at the beginning of this
letter or any substitute address, fax number or department or officer as BoS may notify to the other parties by not less than five
Business Days’ notice.

 

13.3.                        The address of the Borrower for any communication or document to be
made or delivered under or in connection with this letter is its registered
office at the time such communication or document is made or delivered.  The fax number of the Borrower for any
communication or document to be made or delivered under or in connection with
this letter is the fax number most recently provided to BoS
by the Borrower.

 

13.4.                        Any communication made or document made or delivered by one person
to another under or in connection with this letter will only be effective:-

 

(a)                                  if by way of fax, when received in legible form; or

 

(b)                                 if by way of letter, when it has been delivered to the relevant
address or three Business Days after being deposited in the post postage
prepaid in an envelope addressed to it at that address,

 

and, if a
particular department or officer is specified as part of the address details
referred to in clause 13.2 above, if addressed to that department or officer.

 

13.5.                        Any communication or document to be made or delivered to BoS will be
effective only when actually received by BoS and then only if it is expressly
marked for the attention of the department or officer identified with its name
above (or any substitute department or officer as BoS shall specify for this
purpose).  Any communication or document
made or delivered to the Borrower in accordance with this clause will be deemed
to have been made or delivered to each of the Group Companies.

 

13.6.                        BoS may rely upon any
communication by telephone or fax purporting to be on behalf of the Borrower by
anyone notified to BoS as being
authorised to do so, without enquiry by BoS as to
authority or identity.  The Borrower
agrees to indemnify BoS against any
liability incurred or sustained by BoS as a
result.

 

14.                               Miscellaneous

 

14.1.                        No failure or delay by BoS in
exercising any right or remedy under any BoS Document
shall operate as a waiver, and no single or partial exercise shall prevent
further exercise, of any right or remedy.

 

14.2.                        If at any time any provision of this letter is or becomes illegal,
invalid or unenforceable in any respect under any law of any jurisdiction,
neither the legality, validity or enforceability of the remaining provisions
nor the legality, validity or enforceability of such provisions under the law
of any other jurisdiction shall in any way be affected or impaired.

 

14.3.                        The schedules referred to in this letter shall form part of this
letter.

 

7

 

14.4.                        Save to the extent expressly provided to the contrary in a BoS Document, a person who is not a party to a BoS Document may not enforce any of its terms under the
Contracts (Rights of Third Parties) Act 1999.

 

15.                               Fees and Expenses

 

15.1.                        The Borrower will pay to BoS an
arrangement fee of £25,000 payable on drawdown of the Term Loan.

 

15.2.                        The Borrower will pay or reimburse to BoS
(on a full indemnity basis) all reasonable legal, accountancy, valuation, due
diligence and other fees, costs and expenses or tax charged to or incurred by BoS in connection with the BoS
Documents (including the amendment, waiver, enforcement or preservation of the BoS rights) on demand. 
The Borrower authorises BoS to debit
any operating account it has with BoS with the
amount of any such fees, costs, expenses or tax which is payable from time to
time.

 

16.                               Law

 

This letter
will be governed by and construed according to English law and the Borrower
submits to the jurisdiction of the English Courts.

 

	
  Yours
  faithfully

  	
   

  
	
   

  	
   

  
	
  /s/
  Tim Procter

  	
   

  	
   

  
	
  for
  and on behalf of

  	
   

  
	
  THE
  GOVERNOR AND COMPANY

  	
   

  
	
  OF
  THE BANK OF SCOTLAND

  	
   

  
	
   

  	
   

  
	
  Agreed
  and accepted on behalf of Zareba Systems Europe Limited

  	
   

  
	
   

  	
   

  
	
  By.

  	
  /s/
  Donald Dalland Jr

  	
   

  	
  Director

  	
   

  
	
   

  	
   

  	
   

  
	
  /s/
  Gregory Anshus

  	
   

  	
  Director/Secretary

  	
   

  
	
   

  	
   

  
	
  Date:

  	
   

  
							

 

IMPORTANT NOTICE:  As with any
legally binding agreement, we recommend that you consult your solicitor or other
independent legal adviser before accepting this letter.

 

8

 

SCHEDULE
1

 

CONDITIONS
PRECEDENT

 

1.                                      Drawdown

 

A Notice of
Drawdown.

 

2.                                      Security

 

2.1.                              A first and only debenture from each Group Company.

 

2.2.                              A Composite Guarantee by each Group Company (as guarantor) in favour
of BoS on account of each Group Company
(as principal).

 

2.3.                              The Postponement Agreement

 

3.                                      Financial Information

 

3.1.                              Financial Statements of REF Co for the period to 31 December 2003.

 

3.2.                              The management accounts of REF Co for the period to 31 August 2004.

 

3.3.                              Whatever information regarding the trading and financial position of
each Group Company that BoS may
reasonably require.

 

3.4.                              A financial due diligence report addressed to BoS
in a form satisfactory to BoS which
addresses, inter alia,  post and current
trading results, current tax position and trading projections.

 

3.5.                              An auditors non-statutory net assets letter, and a board memorandum
in relation to the net asset position of the Target and Rutland Electric
Fencing Co Limited.

 

4.                                      Refinancing and
Subscription

 

4.1.                              Evidence that all Security Rights, guarantees and indemnities
granted by any Group Company have been or will be discharged at or before
drawdown.

 

4.2.                              Evidence (including Certified Copies of applicable documents and
resolutions) that each relevant Group Company has complied with Sections
151-158 of the Companies Act 1985.

 

4.3.                              Details of all bonds, indemnities and guarantees issued by any bank
or other person on behalf of any Group Company.

 

4.4.                              A signed copy of the letter setting out the terms of the Committed
Working Capital.

 

4.5.                              Evidence that £2,000,000 has been invested in the Borrower by Waters
Instruments, Inc. in respect of 1,000,000 shares in the Borrower, and a
Certified Copy of the Articles.

 

5.                                      Administrative/Secretarial

 

5.1.                              A Secretary’s Certificate in respect of each company which is a
party to a BoS Document.

 

9

 

5.2.                              An account mandate with BoS in respect
of each Group Company in relation to each bank account required for the proper
operation of the Term Loan and the Security Documents.

 

5.3.                              The information and evidence in respect of the Borrower required by BoS to comply with its anti money laundering procedures.

 

6.                                      Property

 

6.1.                              A Certified Copy of the Leases.

 

7.                                      Acquisition

 

7.1                                 A Certified Copy of the executed Acquisition Agreement with
confirmation from the Borrower’s solicitors that completion has taken place
apart from payment of that part of the consideration to be funded by the Term
Loan.

 

7.2                                 A Certified Copy of the Acquisition Documents (other than the
Acquisition Agreement).

 

7.3                                 A Certified Copy of the documents entered into for the purpose of
effecting the Reorganisation, including evidence that the agreements referred
to at paragraph 20, Schedule 2, have been completed in accordance with their
terms prior to the Acquisition Agreement being entered into.

 

7.4                                 A Certified Copy of the Deed of Indemnity.

 

7.5                                 A Certified Copy of the Intercompany Credit Agreement.

 

10

 

SCHEDULE
2

 

REPRESENTATIONS
AND WARRANTIES

 

The
Borrower represents and warrants that:

 

1.                                       each Group Company is duly incorporated and validly existing under
the laws of the jurisdiction of its incorporation;

 

2.                                       no Group Company has any Borrowings (other than Permitted
Borrowings) and no Security Right (other than a Permitted Security Right)
exists over the property or assets of any of them;

 

3.                                       no Default has occurred and is continuing unwaived;

 

4.                                       each Group Company has power to enter into and comply with its
obligations in terms of the BoS Documents;

 

5.                                       (subject to registration of the Security Documents under the
Companies Act 1985) everything has been done (including obtaining any necessary
consents) in order (1) for each Group Company to comply with its obligations
under the BoS Documents and (2) to ensure that
those obligations are legally binding;

 

6.                                       execution of and compliance with the BoS
Documents does not cause any Group Company to breach:

 

6.1.                              any law, regulation, judicial or official order to which it is
subject;

 

6.2.                              its memorandum or articles of association; or

 

6.3.                              any letter, undertaking or restriction to which it is a party or
subject; and will not result in the imposition of any Security Right (other
than under a BoS Document) on any of its
assets;

 

7.                                       each statement of fact contained in the Business Plan is materially
correct and, so far as the Borrower is aware, there are no other matters
concerning any Group Company not already disclosed in writing to and accepted
by BoS which would materially qualify or
contradict the Business Plan;

 

8.                                       all statements of opinion in the Business Plan were, when made,
given in good faith after careful consideration and on the basis of reasonable
assumptions and the Borrower is not aware of anything which might affect their
accuracy;

 

9.                                       save as disclosed to BoS in
compliance with paragraph 2.2 of Schedule 3, no Material Litigation is current,
pending or (so far as the Borrower is aware) threatened against any Group
Company or its assets nor is there subsisting any unsatisfied judgement or
award given against any of them by any court, arbitrator or other body;

 

10.                                 the Financial Statements of the Group delivered to BoS in terms of Schedule 1 were prepared in accordance with
GAAP and give a true and fair view of the financial condition of the Group at
the end of the relevant period and there has been no material adverse change in
the financial condition of the Group since the date of those accounts;

 

11.                                 the management accounts of the Group delivered to BoS in terms of Schedule 1 have been prepared with due care
and attention and accurately reflect the financial

 

11

 

position of the
Group in all material aspects as at their date and there has been no material
adverse change in the financial condition of the Group since the date of those
accounts;

 

12.                                 the copies of all Certified Copy documents and other documents
delivered to BoS are true, accurate and
complete in all material respects;

 

13.                                 the most recent Financial Statements of the Group were prepared in
accordance with GAAP and give a true and fair view of the financial condition
of the Group at the end of the relevant period and there has been no material
adverse change in the financial condition of the Group since the date of those
statements;

 

14.                                 the most recent management accounts of the Group have been prepared
with due care and attention and accurately reflect the financial position of
the Group in all material aspects as at their date and there has been no
material adverse change in the financial condition of the Group since the date
of those accounts;

 

15.                                 on drawdown of the Term Loan, the Borrower will be the beneficial
owner of the issued share capital of each other Group Company free from any
Security Right (other than a Permitted Security Right);

 

16.                                 each Group Company holds all licences and consents (including
Environmental Licences) necessary for the ownership of its property and which
allow it to comply with the terms of the BoS Documents
and to conduct its business and has complied in all material respects with
those licences and consents and with Environmental Law;

 

17.                                 no Dangerous Substance has been used, disposed of or released at or
from any property owned or occupied by a Group Company or (to the best of the
Borrower’s knowledge) from any adjoining property, which, in either case, is
likely to result in a liability which, in the opinion of BoS,
would have a Material Adverse Effect;

 

18.                                 no notice has been received by a creditor of any Group Company or
Target that it may challenge the validity of the Reorganisation, nor does the
Borrower have any reason to consider that the special resolutions passed as
part of the Reorganisation may not be held to be valid;

 

19.                                 each Group Company is either owner or licensee of all Intellectual
Property Rights used in its business and use of them does not infringe any
third party rights;

 

20.                                 the Reorganisation has been completed in accordance with the terms
of:

 

20.1.                        an agreement entered into between L Dickinson (1) BH Todd (2) and No
552 Leicester Limited (3); and

 

20.2.                        an agreement entered into between No 552 Leicester Limited (1) Dilip
Dattai (liquidator of No 552 Leicester Limited) (2) No 548 Leicester Limited
(3) No 549 Leicester Limited (4).

 

12

 

SCHEDULE 3

 

GENERAL
COVENANTS

 

1.                                       The Borrower shall, save with the prior written consent of BoS:-

 

1.1.                              ensure that its obligations in respect of the Term Loan and the
obligations of itself and each other Group Company under the Security Documents
at all times rank ahead of all other Borrowings of each Group Company unless
statutorily preferred;

 

1.2.                              notify BoS in writing
of any Default immediately upon becoming aware of it, at the same time
describing the steps (if any) being taken to nullify or mitigate its effects.

 

2.                                       The Borrower shall, and shall procure that each other Group Company
shall, unless it has a prior written waiver from BoS:-

 

2.1.                              effect and maintain (with BoS interest
noted on them) sufficient and appropriate policies of insurance of its business
and assets and supply copies or evidence of them on written demand by BoS;

 

2.2.                              advise BoS in writing
promptly of any Material Litigation;

 

2.3.                              take whatever steps and execute whatever documents BoS may reasonably require in order to give effect to the
Security Documents;

 

2.4.                              have and maintain all licences and authorisations necessary under
any law or regulation affecting the conduct of its business;

 

2.5.                              comply with all Statutory Controls and promptly give to BoS a copy of any notice concerning compliance with them;

 

2.6.                              preserve and defend its Intellectual Property Rights and observe all
covenants and stipulations affecting them;

 

2.7.                              at the Borrower’s expense, permit BoS
to obtain valuations of whatever Group assets which BoS
may, at any time (but not more than once in each calendar year), reasonably
require;

 

2.8.                              ensure that all pension schemes operated by the Group are properly
funded to the extent required by applicable laws based on reasonable actuarial
assumptions;

 

2.9.                              on receiving the same, notify BoS of any
actual or threatened claim against any Group Company in respect of an alleged
breach of Environmental Law or remedial obligation or liability under such law
which could, if well-founded, (1) have a Material Adverse Effect or (2)
constitute a material liability of that Group Company (which shall be judged
solely by BoS);

 

2.10.                        indemnify BoS, any
receiver appointed by BoS and their
respective officers, employees and agents against all costs and expenses
suffered or incurred by them which arise as a result of (1) any actual or
threatened breach of Environmental Law, (2) any actual or threatened release of
or exposure to a Dangerous Substance on, at or from the premises or operations
of any Group Company or (3) any actual or threatened claim referred to in 2.9
above whether such claim has a Material Adverse Effect or not.

 

3.                                       The Borrower shall procure that (save as referred to below) the
amount of any Net Proceeds shall be applied in prepayment of the Term Loan,
subject as follows:-

 

13

 

3.1.                              the amounts to be applied in prepayment of the Term Loan shall be
applied as soon as is reasonably practicable after receipt by a Group Company
(and in any event within 5 days of such receipt or expiry) provided that (if
requested by the Borrower) BoS shall, on
receipt of any Net Proceeds, credit them to an interest bearing account with BoS which is subject to the Security Documents and will
apply such amount in order to mitigate the Break Costs payable by the Borrower
pursuant to this letter;

 

3.2.                              the terms of clause 2.7 of this letter shall apply to any such
prepayment (other than any requirement therein that the amount prepaid shall be
of any specific amount).

 

4.                                       The Borrower shall not, and shall procure that each other Group
Company shall not, save with the prior written consent of BoS:-

 

4.1.                              grant or permit to subsist any Security Right other than a Permitted
Security Right;

 

4.2.                              incur or contract to incur or permit to subsist any Borrowings other
than Permitted Borrowings;

 

4.3.                              dispose of or part with control of (whether by a single transaction
or a series of transactions) any asset or undertaking (other than a Permitted
Disposal);

 

4.4.                              carry on any business other than that undertaken at the date of
acceptance of this letter or carry on any business outside the United Kingdom
except to an extent that is not material in the context of the Group;

 

4.5.                              lend or give credit to or indemnify or guarantee any other person(s)
unless it is (1) to or on account of the obligations of another Group Company
which has granted Full Group Security, (2) in the ordinary course of trade or
(3) employee loans of up to £10,000 in aggregate;

 

4.6.                              join any partnership or enter into any joint venture with any other
person or merge or amalgamate with any other person (other than as part of a
solvent reconstruction with the prior written consent of BoS);

 

4.7.                              alter the accounting principles and practices applied in its
Financial Statements (unless to comply with GAAP or on the advice of its
auditors);

 

4.8.                              alter its accounting reference date or change its auditors;

 

4.9.                              enter an arrangement for finance not shown in its balance sheet as
Borrowings;

 

4.10.                        factor or discount its debts;

 

4.11.                        declare or make any Distribution other than a Permitted
Distribution;

 

4.12.                        allow any Group Company which is dormant to undertake any
significant accounting transaction or otherwise commence trading or to acquire
any assets or assume any rights or liabilities, in each case without first
having granted Full Group Security;

 

4.13.                        agree to amend or waive or permit the amendment or waiver of any of
the Acquisition Documents or the Articles in any way which, in the opinion of BoS, is likely to have an adverse effect upon the interests
of BoS under the BoS
Documents.

 

14

 

SCHEDULE
4

 

FINANCIAL
COVENANTS

 

1.                                       The Borrower covenants with BoS as
follows:-

 

1.1                               Receivables Cover

 

The ratio of
Eligible Debtors to the Overdraft shall not be less than 2:1 for the period
from the date of drawdown and thereafter.

 

1.2                               Bank Interest Cover

 

The ratio of
EBIT to Senior Interest for the Test Period ending on a Test Date set out in
column 1 below shall not be less than the level set out opposite in column 2
below:-

 

	
  1

  Test Date

  	
   

  	
  2

  Ratio

  
	
   

  	
   

  	
   

  
	
  30 June of each year (commencing 30 June

  2005)

  	
   

  	
  3:1

  

 

1.3                               Cash Flow Cover

 

The ratio of
CFADS to Senior Debt Service for the Test Period ending on a Test Date set out
in column 1 below shall not be less than the level set out opposite in column 2
below:-

 

	
  1

  Test Date

  	
   

  	
  2

  Ratio

  
	
   

  	
   

  	
   

  
	
  the end of each calendar month in each year

  commencing with 30 September 2005 as the

  first such date

  	
   

  	
  1.25:1

  

 

2.                                       The financial covenants in paragraphs 1.2 and 1.3 shall be tested by
reference to the latest Financial Statements of the Borrower and the financial
covenant in paragraph 1.1 shall be tested on a monthly basis by reference to
the latest Financial Statements of the Borrower or, if more recent, to the
latest management accounts of the Group provided that, where any financial
covenant is tested by reference to management accounts it shall be tested again
by reference to Financial Statements when the relevant Financial Statements
become available.

 

3.                                       For the purposes of this Schedule 4:-

 

“CFADS”
means, for any specified period,
EBITDA, plus or minus net movements in working capital, less tax paid and
capital expenditure paid (net of capital expenditure funded by asset disposals
and/or hire-purchase and/or finance leasing) by the Group plus any exceptional
or extraordinary items received in cash and minus any exceptional or
extraordinary items paid in cash, in each case in that period.

 

“Deal
Costs” means an amount equal to the
amount of all arrangement fees, underwriting fees and legal, accounting,
valuation and diligence costs and expenses up to an aggregate amount of
£300,000 incurred in relation to the acquisition of the Target and its
financing.

 

“EBIT”
means, for any specified period, the
consolidated profit of the Group before the deduction of Interest and taxation
or the addition of Interest receivable,

 

15

 

disregarding
profits or losses arising in respect of exceptional or extraordinary items and
adding back Deal Costs (to the extent deducted), in each case in that period.

 

“EBITDA” means, for any specified period, EBIT for such period after adding
back depreciation and amortisation of goodwill (or any other intangible assets)
to the extent deducted from EBIT, in each case in that period.

 

“Eligible
Debtors” means, at any time, the
aggregate of all debts due to each Group Company in the ordinary course of
trading outstanding for not more than 90 days from date of invoice and which
are not bad or doubtful but excluding:-

 

(a)                                  any debt owed by another Group Company;

 

(b)                                 any debt owed by any person who is also a creditor of a Group
Company to the extent of the amount owed by that Group Company to that
creditor; and

 

(c)                                  any debt which has been assigned or charged to or is held in trust
for any third party or is subject to any factoring or invoice discounting or
similar arrangement

 

with any
adjustments BoS may from time to time consider
to be appropriate in the context of the business of each Group Company and the
Term Loan.

 

“GAAP” means generally accepted accounting principles and practices in the
UK.

 

“Interest” means, for any specified period, interest and any amounts in the
nature of interest in relation to any Borrowings (including, without
limitation, the interest element of finance leases, guarantee fees,
non-utilisation fees, discount and acceptance fees and payments under any
hedging arrangements on a net basis but excluding arrangement fees), in each
case in that period.

 

“Overdraft”
means the overdraft from time to time
outstanding under the Committed Working Capital.

 

“Senior
Debt Service” means, in relation to
any specified period, the aggregate of Senior Interest and all scheduled
repayments due by the Group to BoS, in each
case in such period.

 

“Senior
Interest” means, in relation to any
specified period, the aggregate amount of Interest attributable to the total
Borrowings of the Group from BoS charged,
accrued or capitalised, less Interest receivable in respect of sums standing at
credit of accounts of a Group Company with BoS in respect
of which BoS has valid and enforceable rights of
set-off, in each case in such period.

 

“Test
Date” means  (1) in relation to sub-clause 1.2 of this
Schedule, 30 June of each year, commencing 30 June 2005 and (2) in relation to
sub-clause 1.3 of this Schedule, the end of each calendar month in each year,
commencing 30 September 2005..

 

“Test
Period” means a period of 12 months
ending on a Test Date.

 

4.                                       If the Borrower determines (after the date of this letter) that the
accounting principles applied in the preparation of the Financial Statements or
the management accounts should be changed, or that the introduction or implementation
of any accounting standards or rules require that any such accounting
principles be changed, the Borrower shall notify BoS
of such circumstances.  If BoS considers that the financial covenants in this Schedule
require to be amended as a result of any such change in accounting principles, BoS and the Borrower shall negotiate in good faith to amend
the financial covenants in order to provide BoS
with substantially the same protection as the financial covenants set out in
this letter.

 

16

 

SCHEDULE
5

 

FINANCIAL
INFORMATION COVENANTS

 

1.                                       The Borrower covenants that it will supply to BoS:-

 

1.1                                 within 9 months after the end of each financial year of the Borrower
two copies of its Financial Statements and if available a copy of the Financial
Statements of each other Group Company;

 

1.2                                 within 28 days before the commencement of each financial year of the
Borrower, its annual budget (including profit and loss account, balance sheet,
cash flow forecasts and projected capital expenditure) for the next financial
year and a consolidated annual budget for the Group (other than in respect of
the financial year ended 31 December 2004in which case the Business Plan will
satisfy this requirement);

 

1.3                                 within 21 days after the end of each month in each financial year of
the Borrower, management accounts (including profit and loss account, balance
sheet and cash flow statements) on a consolidated basis for the Group and
showing a comparison with budget together with commentary by the finance
director on those management accounts and an aged debtor listing of REF Co;

 

1.4                                 at the same time as it delivers the Financial Statements or the
management accounts referred to above, a certificate of compliance with the
financial covenants set out in Schedule 4 signed by a director of the Borrower
and, in the case of the Financial Statements only, the Borrower’s auditors,
setting out in reasonable detail supporting computations and in form and
content acceptable to BoS;

 

1.5                                 such further financial information as BoS
may from time to time reasonably require.

 

2.                                       The Borrower also covenants that:-

 

2.1.                              it will ensure that all Financial Statements delivered by it in
terms of paragraph 1.1. above and all management accounts delivered by it in
terms of paragraph 1.3 above are prepared in accordance with GAAP (subject, in
the case of the management accounts, to the limitations applicable to unaudited
accounts) and, in the case of the Financial Statements, show a true and fair
view of the financial position of the relevant Group Company;

 

2.2.                              it will identify from any consolidated accounts prepared for itself
and its Subsidiaries the financial performance of any undertaking included in
those accounts as a subsidiary undertaking (which is not a Subsidiary) and will
provide details of all financing agreements and arrangements to which any Group
Company is a party which need not be shown in the Financial Statements of the
Borrower;

 

2.3.                              it will ensure that details of all bank accounts operated by any
Group Company (other than with BoS) are made available to BoS on a monthly
basis and that a statement of all credit balances on such accounts is included
in the management accounts provided to BoS in terms of paragraph 1.3 above.

 

2.4.                              it will promptly provide to BoS such documentation and/or
information as BoS may request from time to time in relation to the Group (or
any Group Company or any other person connected with any Group Company) in
order for BoS to comply with any law, regulation
or guidelines applicable to it from time to time (including, without
limitation, any anti-money laundering or “know your customer” rules).

 

17

 

SCHEDULE
6

 

EVENTS
OF DEFAULT

 

1.                                       The Borrower fails to pay any sum due under a BoS Document
on its due date  other than as a result
of the failure of the appropriate payment transmission system provided that
such payment is made to BoS within 2
Business Days of the due date;

 

2.                                       any written information or projection given or any representation,
warranty or statement made or repeated by or on behalf of any Group Company
under the BoS Documents (whether before or after
the date of this letter) is incorrect, inaccurate, incomplete or, in the
opinion of BoS, misleading in any respect
and, if the relevant circumstances are capable of remedy, those circumstances
are not remedied within 7 days of notice by BoS
calling for its remedy;

 

3.                                       any Borrowings of any Group Company (other than under a BoS Document) in excess of £100,000 are not paid when due
for payment (whether because of acceleration or otherwise) or within any
originally permitted period of grace or any creditor of all or any of the Group
Companies becomes entitled to declare any such borrowings due and payable prior
to their stated maturity;

 

4.                                       the Borrower fails to comply with the terms of Schedule 4 or any
Group Company fails to comply with the terms of any of paragraphs 3.1, 3.2,
3.3, 3.13 or 3.14 of Schedule 3;

 

5.                                       any Group Company or any other person fails to comply with any other
covenant, undertaking or obligation given or owed by it under a BoS Document which is not remedied to the satisfaction of BoS within 14 days after the first of (1) a Group Company
being aware of the failure or (2) notice by BoS
calling for its remedy (should BoS reasonably
consider it to be remediable);

 

6.                                       any Group Company ceases or threatens to cease to carry on its
business or a significant part of it (except as part of a solvent
reconstruction approved by BoS) or
suspends or threatens to suspend payment of its debts or is unable or is deemed
to be unable to pay its debts within the meaning of Section 123 (1) of the
Insolvency Act 1986;

 

7.                                       a proposal is made or a nominee or supervisor is appointed for any
Group Company for a composition in satisfaction of its debt or for a scheme of
arrangement of its affairs or other arrangement or any proceedings for the
benefit of its creditors are commenced under any law, regulation or procedure
relating to the reconstruction or readjustment of debt;

 

8.                                       any step is taken (including, without limitation, the making of an
application or the giving of any notice) by a Group Company or by any other
person to appoint an administrator in respect of any Group Company;

 

9.                                       any steps are taken (including, without limitation, the making of an
application or the giving of any notice) by a Group Company (without the prior
written consent of BoS) or any
other person to wind up or dissolve any Group Company or to appoint a
liquidator, trustee, receiver, administrative receiver or similar officer to
any Group Company or any part of its undertaking or assets;

 

10.                                 any attachment, distress, diligence, arrestment, execution or other
legal process (not being reasonably considered by BoS
to be defensible or vexatious, in good faith) is levied, enforced or sued
against a Group Company or its assets or any person validly takes possession of
any of the property or assets of a Group Company or steps are

 

18

 

taken by any
person to enforce any Security Right against any of the property or assets of a
Group Company;

 

11.                                 any event occurs or proceedings are taken in respect of a Group
Company in any jurisdiction to which it is subject which has an effect
equivalent or similar to any of the events mentioned in paragraphs 6 to 10
(inclusive) above;

 

12.                                 any part of a BoS Document
ceases to be legal or effective (or a Group Company so alleges) or any consent
required to enable a Group Company to perform its obligations under a BoS Document ceases to have effect;

 

13.                                 notice of withdrawal or discontinuance of any guarantee or security
provided by any third party (including any Group Company) is served on BoS and a replacement guarantor suitable to BoS cannot be found within 7 days of receipt of such notice;

 

14.                                 either (a) control of any Group Company passes to any person or
persons (whether acting individually or in concert) who is or are not a
shareholder in it immediately after Completion or (b) there is a Change of
Control, in each case without the prior written consent of BoS;

 

15.                                 any licence, authority, permit, consent, agreement or contract which
is material to the business from time to time of any Group Company is
terminated, withheld or modified which in the opinion of BoS,
will have a Material Adverse Effect;

 

16.                                 in the reasonable opinion of BoS at any time
after the date of this letter:-

 

16.1.                        there is a risk of material liability to BoS
under Environmental Law or because it has taken security (direct or third
party) for the Term Loan; or

 

16.2.                        the value of any asset of any Group Company may be diminished in any
material way because of Environmental Law; or

 

16.3.                        any Group Company does not comply with regulations or the law
applicable to its business or with Environmental Law or Licence(s) which
failure to comply will have a Material Adverse Effect;

 

17.                                 any Material Litigation is commenced or initiated against any Group
Company;

 

18.                                 any other circumstance or event occurs or arises which has or which
will have a Material Adverse Effect.

 

19

SCHEDULE 7

 

NOTICE OF DRAWDOWN

 

[Zareba Systems Europe
Limited Headed Paper]

 

To:                              Bank of Scotland

Queen Street

Norwich

NR2 4SG

 

Date:
• 2004

 

Dear
Sirs

 

As
required under Clause 1 of the facility letter dated • 2004 (the “Facility Letter”) between BoS
and ourselves as Borrower in respect of banking facilities of £2,500,000 (the “Facilities”),
we now give you notice of our intention to drawdown under the Facilities as
follows:

 

1.                                       Date of Drawdown:  •.

 

2.                                       Facility and Amount:  Term
Loan of £2,500,000.

 

3.                                       Payment instructions: •

 

4.                                       We confirm that:-

 

4.1                                 the matters represented by us and set out in Schedule 2 of the
Facility Letter are true and accurate on the date of this notice as if made on
that date;

 

4.2                                 no Default has occurred and is continuing or would result from the
proposed drawdown.

 

Words
and expressions in this notice shall bear the same meaning as in the Facility
Letter.  This is a BoS
Document.

 

	
  Yours
  faithfully

  
	
   

  
	
   

  	
   

  
	
  Director/Secretary

  

 

 

20

 

SCHEDULE 8

 

SECRETARY’S CERTIFICATE

 

[Zareba Systems Europe
Limited Headed Paper]

 

To:                              Bank of Scotland

3 Queen Street

Norwich 
NR2 4SG

 

Date:
• 2004

 

Re                                 :                                            Zareba Systems Europe Limited (the “Company)

 

Registered Office : •

 

Registered Number : •

 

Term
Loan and Working Capital Facilities of £3,000,000 (the “Facilities)

 

I,
[insert full name], the Company Secretary certify that:-

 

1.                                       the Company has the necessary power to borrow and to incur the
liabilities specified in the letters from BoS dated • 2004 offering the Facilities (the “Facility Letters”) and to draw
down the Facilities;

 

2.                                       no borrowing limit of the Company will be exceeded by any borrowing
under the Facility Letters;

 

3.                                       the board of directors of the Company has duly authorised [insert
full names of those authorised] to accept the Facility Letters, to draw down
the Facilities and to execute all documentation necessary to complete the
security specified in Schedule 1 of the Facility Letters (the “Security”) and
all other documentation to be entered into by the Company pursuant to the terms
of the Facility Letters;

 

4.                                       the individuals specified in 3 above were at the time of execution
of the documentation referred to above and remain duly appointed [directors]
[authorised signatories] of the Company;

 

5.                                       the board of directors and, where necessary, the shareholders of the
Company have resolved that the granting of the Security is for the commercial
benefit of the Company;

 

6.                                       the resolutions giving the authorisations referred to above were
validly passed at a properly convened meeting of the board of directors of the
Company and, as the case may be, at a properly convened meeting of the
shareholders of the Company, such restrictions contain declarations of interest
by the directors of the Company sufficient to comply with Section 317 of the
Companies Act 1985 and the articles of association of the Company and such
resolutions are in full force and effect.

 

21

 

I
attach (1) a list of all the directors of the Company and confirm that those
persons listed are all the directors of the Company as at the date of this
letter and (2) a copy of the Certificate of Incorporation of the Company and
confirm that each copy is true, complete and up to date.

 

This
certificate is authorised by the Board of Directors of the Company.

 

 

	
   

  	
   

  
	
  Secretary

  

 

22

 

SCHEDULE 9

 

DEFINITIONS AND INTERPRETATION

 

“Acquisition Agreement” means
the agreement dated on or about 27 September 2004 between, inter alia, the
Vendor and the Borrower under which the Borrower has agreed to purchase 100% of
the issued share capital of the Target.

 

“Acquisition Documents” means
the Acquisition Agreement, the Disclosure Letter and all other documents in the
agreed form under the Acquisition Agreement or otherwise to be handed over at
Completion under the Acquisition Agreement.

 

“Articles “ means the articles of association of the Borrower
as in force at the date of this letter.

 

“Borrowings” means (without double counting):-

 

(a)                                  money borrowed or raised and includes capitalised interest;

 

(b)                                 any liability under any bond, note, debenture, loan stock,
redeemable preference share capital or other instrument or security;

 

(c)                                  any liability for acceptance or documentary credits or discounted
instruments;

 

(d)                                 any liability for the acquisition cost of assets or services payable
on deferred payment terms where the period of deferment is more than 90 days;

 

(e)                                  any liability under debt purchase, factoring and similar agreements
and capital amounts owing under finance leases, hire purchase or conditional
sale agreements or arrangements;

 

(f)                                    the net liability under any derivative transaction protecting
against or benefiting from fluctuations in any rate or price;

 

(g)                                 any other arrangements having the commercial effect of borrowing;
and

 

(h)                                 any liability under any guarantee or indemnity in respect of any
obligation falling within (a) to (g) (inclusive) above.

 

“BoS” means The Governor and
Company of the Bank of Scotland incorporated by Act of Parliament and having
its head office at The Mound, Edinburgh EH1 1YZ and its successors, assignees
and transferees.

 

“BoS Base Rate” means the
base lending rate of BoS as that rate fluctuates from time to time.

 

“BoS Documents” means this
letter, the Security Documents, the Treasury ISDA Documents, any letter or
agreement in relation to the Committed Working Capital and all documents
ancillary or supplemental to any of them.

 

“BoS Group” means BoS, HBOS plc (Registered No. SC218813), any Subsidiary of
either of them, any holding company of either of them and any Subsidiary of any
such holding company.

 

23

 

“Break Costs” means, in
relation to any amount of the Term Loan which is repaid or prepaid or
recovered, the amount calculated by BoS as being
the amount by which (1) the interest which would have been payable to BoS under this letter on such amount at the end of the then
current interest period expiring on the next Repayment Date exceeds (2) the
interest which BoS would have received by placing
a deposit, equal to such amount with a leading bank in the London Interbank
Market for a period starting on the Business Day following receipt or recovery
of such amount and ending on the last day of the then current interest period
expiring on the next Repayment Date.

 

“Business Day” means a day (other than a Saturday or Sunday)
when the branch of BoS at which
the Borrower’s account is located is open for business.

 

“Business Plan” means the business plan (including any
schedules and appendices) prepared by Waters Instruments Inc headed “Waters
Business Plan” and dated June 2004.

 

“Certified Copy” means a copy certified as true, complete and
up to date by the specified person or, if no-one is specified, by either the
secretary of the relevant Group Company or the Borrower’s solicitors.

 

“Change of Control” means any
circumstances in which Waters Instruments Inc ceases to hold legally and
beneficially not less than 50 per cent of the issued share capital and voting
rights of the Borrower.

 

“Committed Working Capital”
means any facility or facilities for working capital purposes at any time given
to a Group Company by BoS and the
amount outstanding thereunder (as the context requires).

 

“Completion” means completion
of the Acquisition Agreement in accordance with its terms.

 

“Dangerous Substances” means any substances capable of
causing harm to man or any other living organism or damaging the environment.

 

“Deed of Indemnity” means the
deed in respect of certain liabilities of the Target entered into between the
Vendor and the Borrower at Completion.

 

“Default” means any Event of Default or Potential Event of
Default.

 

“Default Rate” means the rate which is two per cent (2%) per
annum over the rate at which interest is paid on the Term Loan under this
letter.

 

“Disclosure Letter” means the
letter from the Vendor to the Borrower dated of even date with the Acquisition
Agreement disclosing certain matters in terms of the Acquisition Agreement.

 

“Distribution” means any dividend, redemption or distribution
of assets by a company to its members whether in cash or otherwise on account
of capital or income.

 

“Environmental Law” means all laws, regulations, directives,
codes of practice, circulars, guidance notices and court decisions (whether in
the UK or elsewhere) concerning the protection of human health or welfare or
the environment or the conditions of the work place or the generation,
transportation, storage, treatment or disposal of Dangerous Substances.

 

“Environmental Licence” means any licence, authorisation or
approval required by Environmental Law.

 

“Event of Default” means an event set out in Schedule 6.

 

“Financial Statements” means the audited annual profit and
loss account, balance sheet and cash flow statement of the relevant company for
each of its financial years (consolidated for

 

24

 

each
financial year during which that company has a subsidiary) together with
related directors’ and auditors’ reports.

 

“Full Group Security” means guarantees in favour of BoS from each Group Company on account of the obligations of
each other Group Company and such security documents by each Group Company
(comprising fixed and floating charges) as BoS may require.

 

“GAAP” means generally accepted accounting principles and
practices in the UK.

 

“Group” means the Borrower, the Target and each of their
Subsidiaries which is not dormant and “Group Company”
is construed accordingly.

 

“Increased Cost” means:-

 

(a)                                  an additional or increased cost incurred by BoS
as a result of it having entered into, or performing, maintaining or funding
its obligations under this letter; or

 

(b)                                 that portion of an additional or increased cost incurred by BoS in making, funding or maintaining all or any advances
comprised in a class of advances formed by or including the Term Loan; or

 

(c)                                  a reduction in any amount payable to BoS
or in the effective return to BoS under the
Term Loan or on its capital; or

 

(d)                                 the foregone amount of any payment made or interest or other return
on or calculated by reference to any amount received or receivable by BoS under the Term Loan;

 

in
each case arising as a result of any change, introduction, interpretation or
administration of any law or regulation after the date of this letter or any
compliance after the date of this letter with any law or regulation relating to
reserve assets, special deposits, cash ratios, liquidity or capital adequacy
requirements or any other form of banking or monetary control (including
controls and requirements of the Bank of England, the Financial Services
Authority, the European Central Bank or any other governmental or regulatory
authority) or the introduction of, changeover to or operation of a single or
unified European currency or otherwise but excluding (1) costs compensated for
by the Mandatory Costs or (2) payments in respect of tax under clause 9.1 of
this letter or (3) costs not generally applicable to U.K. banks.

 

“Intellectual Property Rights” means patents, patent applications,
trade marks, community trade marks, service marks, trade names, brand names,
domain names, registered designs, copyright and all other industrial and
intellectual property rights.

 

“Intercompany Credit Agreement” means an intercompany credit agreement on or around the date hereof
between Waters Instruments, Inc. (1) Zareba Systems Canada, Limited (2) and the
Borrower (3).

 

“Leases” means the leases in
respect of the Properties to be entered into between No 552 Leicester Limited
Limited and REF Co.

 

“Listing” means a listing of
all or any of the shares of the Borrower (or any other Group Company) on any
official list or an admission to trading of all or any of the shares of the
Borrower (or any other Group Company) on any recognised investment exchange or
market of any country (or the sale or issue of any such shares on any such
exchange or market).

 

“Mandatory Costs” means the costs (expressed as an annual
percentage at a rate rounded up to the nearest one eighth per cent) calculated
by BoS in accordance with its usual
practice of complying with any reserve asset and/or special deposit and/or cash
ratio and/or liquidity and/or capital adequacy and/or banking control or
similar requirements of Bank of England, the Financial Services Authority, the
European Central Bank or any other governmental or regulatory authority.

 

25

 

“Margin” means two and one eighth per cent (2.125%) provided
that, if the Borrower breaches any of the financial covenants set out in
Schedule 4, the Margin shall be increased by 2% from the rate otherwise
prevailing for so long as such breach continues.

 

“Material Adverse Effect” means any effect which, in the
reasonable opinion of BoS, is likely
to:-

 

(a)                                  adversely affect the ability of any Group Company to comply with its
obligations under a BoS Document;

 

(b)                                 give rise to a breach of the financial covenants set out in Schedule
4;

 

(c)                                  adversely affect the business, assets or financial condition of the
Group as a whole; or

 

(d)                                 (where the context so admits) result in any of the BoS Documents not being legal, valid and binding on, and
enforceable substantially in accordance with its terms against any party to
that BoS Document or, in the case of any of
the Security Documents, not providing BoS with
enforceable security over the assets to be covered by it.

 

“Material Litigation” means any litigation, arbitration or
administrative proceeding raised or threatened against, or defended by any
Group Company, which involves, (or would involve if an adverse finding were
made in respect thereof) a total liability (whether actual or contingent) in
excess of £100,000 (disregarding for this purpose any litigation which BoS (acting reasonably) is satisfied is frivolous or
vexatious).

 

“Net Proceeds” means each of:-

 

(a)                                  the amount received by any Group Company in relation to any claim
made under the Acquisition Documents (whether in relation to any warranty,
indemnity or otherwise);

 

(b)                                 the amount received by any Group Company by way of insurance proceeds
in respect of any loss or damage incurred or suffered by any Group Company.

 

“Notice of Drawdown” means a written notice in the form set
out in Schedule 8 requesting drawdown of the Term Loan.

 

“Permitted Borrowings” means:-

 

(a)                                  the Term Loan;

 

(b)                                 the Committed Working Capital;

 

(c)                                  Borrowings between Group Companies where each have granted Full
Group Security;

 

(d)                                 commitments of members of the Group under finance lease, hire
purchase or conditional sale agreements or equivalent arrangements, the
principal amount of which does not at any time exceed £100,000 in aggregate;

 

(e)                                  the loan of £850,000 made by Waters Instruments Inc to the Borrower
on 27 September 2004 under the Intercompany Credit Agreement.

 

“Permitted Disposals” means:-

 

(a)                                  the disposal of assets (other than any assets subject to a fixed
charge under the Security Documents) on an arm’s length basis in the ordinary
and usual course of trading including the use of cash for any such purpose; and

 

26

 

(b)                                 disposals of assets (other than any assets subject to a fixed charge
under the Security Documents) between Group Companies where the transferee has
granted Full Group Security.

 

“Permitted Distribution” means any Distribution which:-

 

(a)                                  in the case of a Distribution by any Group Company other than the
Borrower, is made by that Group Company to a Group Company which has granted
Full Group Security;

 

(b)                                 in the case of a Distribution by the Borrower, is a
Distribution  made with the prior written
consent of BoS; or

 

(c)                                  any repayment (whether of capital or interest) of the loan (pursuant
to the Intercompany Credit Agreement) from Waters Instruments, Inc. made in
accordance with the terms of the Postponement Agreement.

 

“Permitted Security Rights” means:-

 

(a)                                  liens and rights of set-off securing obligations which are not
overdue beyond their standard payment dates, arising by operation of law in the
ordinary and usual course of trading;

 

(b)                                 Security Rights arising out of title retention provisions in a
supplier’s standard conditions of supply of goods acquired in the ordinary and
usual course of trading; or

 

(c)                                  Security Rights granted in terms of the BoS
Documents or with the prior written approval of BoS.

 

“Postponement Agreement” means
the postponement agreement by Waters Instruments, Inc. in favour of BoS, dated
on or around the date hereof.

 

“Potential Event of Default” means any event, act or
condition which, with the giving of notice and/or lapse of time, and/or any
other event, act or condition which, in the reasonable opinion of BoS, will or is likely to constitute an Event of Default.

 

“Properties” means the properties at Fencing House, 8 Land’s
End Way, Oakham; 23 Pillings Road, Oakham; 25 Pillings Road, Oakham; and 11
West Road, Bechin.

 

“Qualifying Lender”
means a person which, in relation to the relevant payment, is beneficially
entitled to the income in respect of which the payment is made and is:-

 

(a)                                  a company resident in the United Kingdom for tax purposes; or

 

(b)                                 a company not so resident in the United Kingdom which carries on a
trade in the United Kingdom through a branch or agency and which brings the
payment into account in computing its chargeable profits (within the meaning
given by section 11(2) of the Taxes Act); or

 

(c)                                  a person fulfilling any one of the conditions set out in
sub-sections (3) to (7) of Section 349B of the Taxes Act,

 

in
each case in respect of which the Borrower has not received a notification
(which remains valid) from the Board of the Inland Revenue directing that
Section 349A(1) of the Taxes Act is not to apply to any such payment.

 

“REF Co” means Rutland
Electric Fencing Co Limited (registered number 1942940)

 

27

 

“Reorganisation” means the
reorganisation of REF Co prior to the date of this agreement, pursuant to
section 110 of the Insolvency Act 1986, including a share for share exchange
with No 552 Leicester Limited..

 

“Sale” means any transaction (including, without limitation,
any sale, transfer, lease or other disposal and any series of transactions
whether taking place at the same time or not) pursuant to which all or
substantially all of the business and assets of the Borrower or of the Group
are sold to any person (other than a Group Company which has granted Full Group
Security).

 

“Secretary’s Certificate” means, in respect of a company, a
certificate in the form set out in Schedule 8 executed by the secretary of that
company.

 

“Security Documents” means the documents listed under the
heading of Security in Schedule 1 and any other documents entered into by a
Group Company from time to time creating or evidencing any Security Right or
guarantee in favour of BoS.

 

“Security Right” means any mortgage, charge, security,
pledge, lien, right of set-off, right to retention of title or other
encumbrance, whether fixed or floating, over any present or future property,
assets or undertaking.

 

“Specified Purpose” means to provide the Borrower with funds
in order to meet its obligation pursuant to the Acquisition Agreement to pay
for the total issued share capital of the Target.

 

“Statutory Control” means each of the following which affects
any Group Company or any of its assets from time to time:-

 

(a)                                  any legislation (including delegated legislation);

 

(b)                                 any consent made or given under any legislation; and

 

(c)                                  any notice, order or correspondence related to paragraphs (a) or (b)
above and having the force of law.

 

“Sterling” and the figure “£”
shall mean the lawful currency of the UK.

 

“Subsidiary”
means, in respect of any company, person or entity, any company, person or
entity directly or indirectly controlled by such company, person or entity
(including any Subsidiary acquired after the date of this letter) and “Subsidiaries” shall mean all or any of them, as
appropriate.

 

“Target” No 549 Leicester
Limited (registered number 5136729)

 

“Taxes Act” means the Income and Corporation Taxes Act 1988.

 

“Term Loan” means the term
loan given under this letter and the amount of it outstanding at any time (as
the context requires).

 

“Treasury” means HBOS Treasury Services PLC (registered
number 2692890), having its registered office at 33 Old Broad Street, London
EC2N 1HZ.

 

“Treasury Counter Indemnity”
means the counter indemnity relating to the Treasury Guarantee entered, or to
be entered, into between the Borrower and BoS in the form
set out in the Treasury ISDA Documents.

 

“Treasury Guarantee” means
the agreed form guarantee entered into between Treasury and BoS now or in the future in relation to all sums due and payable
by the Borrower or any Group Company under any hedging/swap/interest
rate/currency documentation or any similar

 

28

 

documentation
in respect of any forward foreign exchange contracts or other derivative
contracts entered into now or in the future between the Borrower and Treasury.

 

“Treasury Indemnified Events”
means all actions, suits, proceedings, claims, demands, liabilities, costs,
expenses, losses, damages and charges whatsoever (except those arising as a
result of the gross negligence or wilful misconduct of BoS)
which may occur in relation to or arising out of BoS
having given the Treasury Guarantee.

 

“Treasury ISDA Documents”
means the form of ISDA master agreement, schedule and associated confirmations
used from time to time by Treasury for entities like the Borrower or such form
as may be adopted from time to time together with all other documents referred
to in, or supplemental to, such documentation.

 

“Vendor” means the persons
listed in Schedule 1 of the Acquisition Agreement.

 

Interpretation

 

Any
reference in this letter to:-

 

(a)                                  statutes, statutory provisions and other legislation shall include
all amendments, substitutions, modifications and re-enactments for the time
being in force and shall include any orders, regulations, instruments or other
subordinate legislation made under the relevant legislation.

 

(b)                                 “control” of any company shall be
interpreted in accordance with Section 840 of the Taxes Act;

 

(c)                                  “including” shall not be construed
as limiting the generality of the words preceding it;

 

(d)                                 any clause, paragraph or schedule shall be construed as a reference
to the clauses in this letter, the schedules to this letter and the paragraphs
in such schedules;

 

(e)                                  any term or phrase defined in the Companies Act 1985 (as amended
from time to time) shall (whether or not it is capitalised) bear the same
meaning in this letter save that any term used in the definition of “Qualifying
Lender” shall be interpreted as such term is interpreted in accordance with the
Taxes Act;

 

(f)                                    words importing the singular shall include the plural and vice versa
and words denoting any gender shall include all genders;

 

(g)                                 this letter and to any provisions of it or to any other document
referred to in this letter shall be construed as references to it in force for
the time being and as amended, varied, supplemented, restated, substituted or
novated from time to time;

 

(h)                                 a person is to be construed to include references to a corporation,
firm, company, partnership, joint venture, unincorporated body of persons,
individual or any state or any agency of a state, whether or not a separate
legal entity;

 

(i)                                     any person is to be construed to include that person’s assignees or
transferees or successors in title, whether direct or indirect;

 

(j)                                     any word or phrase includes all derivations thereof;

 

(k)                                  any “associated person” means, in relation to a person, a person who
is either acting in concert (as defined in the City Code on Takeovers and
Mergers) with that person or is a connected person (as defined in section 839
of the Taxes Act) of that person.

 

29

 

Clause
headings are for ease of reference only and are not to affect the
interpretation of this letter.

 

30

 

	
  

  	
   

  	
  Bank of
  Scotland

  3 Queen Street

  Norwich

  NR2 4SG

  For the attention of Kellie

  Woodard

  
	
   

  	
   

  	
   

  
	
  The Directors

  Zareba Systems Europe Ltd

  (Company
  Number 5176793)

  c/o Mills &
  Reeve

  1 St James Court

  Whitefriars

  Norwich NR3 1RU

  	
   

  	
  Telephone:       01603
  242013

  Fax:                  01603
  242004

  
	
   

  	
   

  	
   

  
	
  (the “Parent”)

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  The Directors

  Rutland Electric Fencing Co Limited

  (Company Number 1942940)

  Fencing House

  8 Lands End Way

  Oakham

  Rutland LE15 6RF

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  (a
  “Subsidiary”)

  	
   

  	
   

  

 

Date: 27
September 2004

 

Dear Sirs

 

COMMITTED WORKING CAPITAL OF £500,000

PAYMENT SYSTEMS

 

We are pleased to
offer you (the “Borrowers”) a committed working capital facility (the “Committed
Working Capital”) and access to payment systems (the “Payment Systems”) on the
terms set out in this letter.  This offer
is open for acceptance by the Borrowers until 30 September 2004 when it will
lapse.  If accepted, this letter and its
schedules will form the agreement between the Borrowers and BoS for the Committed Working Capital and
the Payment Systems.

 

The definitions
which shall apply to this letter are given or referred to in Schedule 2 below.

 

1.                                      Conditions Precedent

 

The Committed Working
Capital may not be drawn or utilised unless:-

 

1.1.                              all or part of the term loan of
£2,214,000 offered by BoS to the
Parent (the “Term Loan”) is drawn down under the  Term Loan Facility Letter;

 

1.2.                              each Borrower has accepted this
letter;

 

1.3.                              an account mandate from each
Borrower has been received by BoS
in relation to each bank account required for the proper operation of the
Committed Working Capital and the Payment Systems and in relation to the
Security Documents; and

 

1.4.                              the information and evidence in
respect of each Borrower required by BoS
to comply with its anti money laundering procedures has been provided to BoS.

 

 

31

 

2.                                      Committed Working Capital/Payment
Systems

 

2.1.                              The limit applicable to the
Committed Working Capital is £500,000 (the “Limit”).  The Borrowers may only use the Committed
Working Capital for general working capital purposes, and the Committed Working
Capital may only be drawn on the terms and conditions set out or referred to in
this letter.

 

2.2.                              BoS will (subject to the limits set
out below) make available to the Borrowers the following facilities in relation
to the Payment Systems:-

 

2.2.1.                     BACS facilities with a limit of
£200,000 (the “BACS Limit”)

 

on the terms and conditions
set out or referred to in this letter.

 

2.3                               Limit

 

2.3.1                        Each Borrower may operate a number
of accounts on which the Committed Working Capital may be drawn.  BoS
may refuse to pay any cheques, orders or withdrawals on any one or more of the
Borrowers’ current accounts where payment would result in the Limit (taking
into account the notional set-off referred to below) being exceeded.

 

2.3.2                        To ascertain the amount
outstanding under the Committed Working Capital and compliance with the Limit, BoS will notionally set off those of the
Borrowers’ Sterling current account credit balances over which BoS considers it has a valid right of set
off against the Borrowers’ Sterling current account debit balances.

 

2.3.3                        The Borrowers must at all times
provide sufficient funds to ensure that the Limit is not exceeded.  If the Limit is likely to be exceeded, the
Parent must notify BoS and advise
which cheque(s) or other requests for utilisation are to be honoured in the
case of competition.  If the Parent fails
to do so BoS may, in its
discretion, refuse to pay a cheque or allow any other utilisation under this
letter which would have the effect of exceeding the Limit.  If BoS
does pay a cheque or allows a utilisation of the Committed Working Capital so
as to exceed the  Limit, that does not
mean that the Limit has changed or that BoS
will agree to pay any other cheque or meet any other payment instruction which
would have the effect of exceeding the Limit.

 

2.3.4                        Unless otherwise agreed with BoS, any debit balance over the Limit and,
where the Committed Working Capital has ceased to be available, the total debit
balance of the Committed Working Capital, will attract interest at the BoS unauthorised rate which will be four
and one eighth per cent (4.125%) per annum over the BoS base rate as that rate fluctuates.

 

2.3.5                        From the date of this letter, each
Borrower ceases to be entitled to use any working capital facilities previously
made available by BoS and any
existing utilisation of them shall, to the extent not repaid or discharged, be
taken into account when assessing compliance with the Limit.

 

2.4                               Availability

 

2.4.1                        Subject to clause 2.4.2 below, BoS shall review the Committed Working
Capital and the Payment Systems annually on the Review Date.  The Borrowers shall deliver such financial or
other information as BoS shall
require to be delivered prior to BoS
deciding whether to extend the Maturity Date

 

2.4.2                        The Committed Working Capital and
the Payment Systems shall cease to be available on the earlier of (a) the
Maturity Date, unless BoS has
agreed in

 

32

 

writing on the Review Date
to its renewal or extension, and (b) the date upon  which BoS
gives notice requiring repayment of the Term Loan (or the amount thereof for
the time being outstanding).

 

2.4.3                        If repayment of the Committed
Working Capital is demanded, any other utilisation of the Committed Working
Capital will cease to be available, the access to the Payment Systems shall be
cancelled and BoS will be entitled
to require the Borrowers to lodge a sufficient amount with BoS as security for the exposure of BoS  in respect of any utilisation of the Committed
Working Capital.

 

2.5                               Repayment

 

The amounts outstanding
under the Committed Working Capital shall (subject to the other provisions of
this letter) be repaid on the date when the Committed Working Capital ceases to
be available.

 

2.6                               Interest

 

The rate of interest
applicable to the Committed Working Capital shall be the annual rate which is
the sum of the Margin plus BoS
base rate as that rate fluctuates. 
Interest will accrue and be calculated by BoS on a day to day basis on the cleared daily debit balance
of the amount drawn down.  A notice of
the accrued interest on each of the Borrowers’ current accounts will be issued
each month and interest will be debited to the Borrowers’ current account on
the date falling 14 days after the date of that notice.

 

2.7                               Mandatory Prepayment and
Cancellation

 

The Borrowers will prepay
the amount outstanding under the Committed Working Capital and will cancel the
undrawn amount of the Committed Working Capital (including the amount arising
from any such prepayment) on the occurrence of any of:-

 

2.7.1                        a Sale;

 

2.7.2                        a Listing;

 

2.7.3                        a Change of Control.

 

3.                                      Business Visa

 

Facilities of up to £20,000
may be drawn by the use of BoS
Business Visa Cards subject to the published terms and conditions and charges
applicable to BoS Business Visa
Cards from time to time.

 

4.                                      Other Borrowers

 

The Committed Working
Capital shall not be available to any other person (whether a subsidiary of the
Parent or not) other than with the express written agreement of BoS and once BoS has received all accession letters and/or security or
other documents it requires in respect of that person and its assets.

 

5.                                      Security

 

The amounts outstanding
under the Committed Working Capital and the Payment Systems will be secured by
the Security Documents.

 

33

 

6.                                      Financial Information/Financial
and other Covenants

 

6.1                                 The Borrowers will supply to BoS the financial information specified in
the Term Loan Facility Letter.

 

6.2                                 The Parent will at all  times comply with the general and financial
covenants set out in Schedules 3 and 4 of the Term Loan Facility Letter.

 

7.                                      Payments

 

7.1.                              All payments by any Borrower to
BoS (being a Qualifying Lender) under this letter shall be free and without
deduction of tax unless such Borrower is required by law to make a payment
subject to deduction or withholding of tax, in which case the amount payable by
such Borrower will be sufficiently increased to ensure that BoS receives and
retains a net sum equal to that which it would have received and retained were
no deduction or withholding made.  If BoS
subsequently receives a tax credit which is referable to the increased payment
and which enhances its position, then it will reimburse the relevant Borrower
sufficient to redress the position up to the amount received so long as by so
doing it does not prejudice receipt or retention of the tax credit.

 

7.2.                              All payments of principal,
interest or commission will be paid to BoS at the relevant Borrower’s branch
unless BoS otherwise directs and
shall be in cleared funds in the relevant currency.  If BoS
receives a payment that is insufficient to discharge all the amounts then due
and payable under the BoS Documents,
BoS shall apply that payment
towards the obligations of the Group Companies under the BoS Documents in such order as BoS considers appropriate and any such
appropriation shall override any instructions by any Group Company.

 

7.3.                              All payments to be made by any
Borrower under the BoS Documents shall be calculated and be made without (and
free and clear of any deduction for) set-off or counterclaim.

 

7.4.                              All sums of interest or commission
will accrue on a daily basis and be calculated on the basis of a year of 365
days (in the case of any amount in Sterling) or 360 days (in the case of any
amount in any other currency) and, in any such case,  for the actual number of days elapsed.  Interest shall continue to accrue on sums due
following a decree or judgement as well as before it, and at the same rate.

 

7.5.                              Any determination by BoS of any
amount of principal, interest, commission or charges or an applicable interest
rate shall, in the absence of manifest error, be conclusive and binding on the
Borrowers.

 

7.6.                              Where the due date for payment of
any amount under any BoS Document is not a Business Day then (without affecting
subsequent payment dates) actual payment will be required on the next Business
Day.

 

7.7.                              Each Borrower agrees that any
monies from time to time standing to its credit on any account (whether
current, deposit, loan or of any other nature whatsoever) with BoS may be
retained as cover for and/or applied by BoS at any time and without notice to
such Borrower (whether on or before or after the expiry of any fixed or minimum
period for which such monies may have been deposited) in or towards payment or
satisfaction of any monies or liabilities due, owing or incurred by such
Borrower to BoS in any manner, whether present or future, actual or contingent,
joint or several, whether incurred as principal or surety (or guarantor or
cautioner) or in any other way whatsoever.

 

7.8.                              If BoS exercises any rights in
respect of any monies as referred to in clause 7.7 (including, without
limitation, any rights of set-off, accounting retention or similar rights) in
respect of any liability of a Borrower and that liability or any part of it is
in a

 

34

 

different currency from any
credit balance against which BoS seeks to exercise its rights, BoS may use the
currency of the credit balance to purchase an amount in the currency of the
liability at the then prevailing BoS spot rate of exchange and to pay out of
the credit balance all costs, charges and expenses incurred by BoS in
connection with that purchase.

 

7.9.                              BoS shall not be liable for any
loss of interest caused by the determination before maturity of any deposits or
any loss caused by the fluctuation in any exchange rate of which any currency
is bought or sold by BoS.

 

7.10.                        If a Borrower fails to pay any
amount due to BoS in Sterling but makes such payment in another currency, the
relevant Borrower shall indemnify BoS against the full cost incurred by BoS
(including all costs, charges and expenses) of converting that payment into
Sterling.

 

7.11.                        The obligations of each Borrower
in relation to the Committed Working Capital and the Payment Systems are joint
and several.

 

8.                                      Indemnity

 

8.1.                              Each Borrower will at all times on
demand indemnify BoS against all
Indemnified Events and the Borrowers will pay to BoS the amount of all payments made (whether directly or by
way of set-off, counterclaim or otherwise) and all losses, costs or expenses
suffered or incurred from time to time by BoS
arising under any liability which BoS
has incurred (directly or indirectly) in relation to any utilisations of the
Committed Working Capital or the Payment Systems including (without limiting
the foregoing generality) any liability of BoS
to Treasury  in relation to forward
foreign exchange contracts entered into between a Borrower and Treasury.

 

8.2.                              The liability of the Borrowers
under clause 8.1 above shall not be affected by any time being given or by
anything being done or not done by BoS.

 

9.                                      Notices

 

9.1.                              Any communication to be made under
or in connection with this letter shall be made in writing and, unless
otherwise stated, may be made by fax or letter.

 

9.2.                              The address and fax number (and
the department or officer, if any, for whose attention the communication is to
be made) of BoS for any communication or document to be made or delivered under
or in connection with this letter is that identified with its name at the
beginning of this letter or any substitute address, fax number or department or
officer as BoS may notify to the other parties by not less than five Business
Days’ notice.

 

9.3.                              The address of each Borrower for
any communication or document to be made or delivered under or in connection
with this letter is its registered office at the time such communication or
document is made or delivered.  The fax
number of each Borrower for any such communication or document to be made or
delivered under or in connection with this letter is the fax number most
recently provided to BoS by such Borrower.

 

9.4.                              Any communication made or document
made or delivered by one person to another under or in connection with this
letter will only be effective:-

 

(a)                                  if by way of fax, when received in
legible form; or

 

(b)                                 if by way of letter, when it has
been delivered to the relevant address or three Business Days after being
deposited in the post postage prepaid in an envelope addressed to it at that
address,

 

35

 

and, if a particular
department or officer is specified as part of the address details set out in
clause 9.2 above, if addressed to that department or officer.

 

9.5.                              Any communication or document to
be made or delivered to BoS will be effective only when actually received by
BoS and then only if it is expressly marked for the attention of the department
or officer identified with its name above (or any substitute department or
officer as BoS shall specify for this purpose). 
Any communication or document made or delivered to the Parent in
accordance with this clause will be deemed to have been made or delivered to
each of the Group Companies.

 

9.6.                              BoS may rely upon any
communication by telephone or fax purporting to be on behalf of any Borrower by
anyone notified to BoS as being authorised to do so, without enquiry by BoS as to authority or identity.  The Borrowers agree to indemnify BoS against any liability incurred or
sustained by BoS as a result.

 

10.                               Miscellaneous

 

10.1                           No failure or delay by BoS in exercising any right or remedy under
any BoS Document shall operate as
a waiver, and no single or partial exercise shall prevent further exercise, of
any right or remedy.

 

10.2                           If at any time any provision of
this letter is or becomes illegal, invalid or unenforceable in any respect
under any law of any jurisdiction, neither the legality, validity or
enforceability of the remaining provisions nor the legality, validity or
enforceability of such provisions under the law of any other jurisdiction shall
in any way be affected or impaired.

 

10.3                           The schedules referred to in this
letter shall form part of this letter.

 

10.4                           Save to the extent expressly
provided to the contrary in a BoS
Document, a person who is not a party to a BoS
Document may not enforce any of its terms under the Contracts (Rights of Third
Parties) Act 1999.

 

11.                               Fees and Expenses

 

11.1                           The Borrowers will pay to BoS:-

 

(a)                                  an arrangement fee of £5,000
payable on acceptance of this letter;

 

(b)                                 bank charges in relation to the
Committed Working Capital in accordance with the standard terms and conditions
of BoS time to time.

 

12.                               EMU Compliance

 

If the introduction of,
changeover to or operation of a single or unified European currency results
in:-

 

(a)                                  the currency in which either the
Committed Working Capital or any of the Payment Systems is provided changing or
being replaced or BoS (in its
reasonable opinion) requiring to amend the BoS
Documents due to changes in price sources for the national currency
of any member state of the European Union or the euro or market conventions
relating to the calculation of interest; and/or

 

(b)                                 BoS incurring an additional or
increased cost in relation to its providing the Committed Working Capital or
any of the Payment Systems;

 

then the Borrowers agree, in
the case of (a) above, that they will permit 
the BoS Documents to be
amended to the extent necessary (in the reasonable opinion of

 

36

 

BoS) to reflect those changed
circumstances and, in the case of (b) above, to indemnify BoS in respect of that additional or
increased cost.

 

13.                               Law

 

This letter will be governed
by and construed according to English law and each of the Borrowers submits to
the jurisdiction of the English Courts.

 

37

 

	
  Yours
  faithfully

  	
   

  
	
   

  	
   

  
	
  /s/ Tim Procter

  	
   

  	
   

  
	
   

  	
   

  
	
  For and on
  behalf of

  	
   

  
	
  THE GOVERNOR
  AND COMPANY

  OF THE BANK OF SCOTLAND

  	
   

  
	
   

  	
   

  
	
  Agreed and
  accepted on behalf of

  Zareba Systems Europe Limited by

  	
  Agreed and
  accepted on behalf of

  Rutland Electric Fencing Co Limited by

  
	
   

  	
   

  
	
  /s/ Donald
  Dalland, Jr

  	
   

  	
     Director

  	
  /s/ Donald
  Dalland, Jr

  	
   

  	
     Director

  
	
   

  	
   

  	
   

  	
   

  
	
  /s/ Gregory
  Anshus

  	
   

  	
  Director/Secretary

  	
  /s/ Gregory
  Anshus

  	
   

  	
  Director/Secretary

  
	
   

  	
   

  
	
  Date:

  	
  Date:

  
									

 

IMPORTANT
NOTICE:  As with any legally binding
agreement, we recommend that you consult your solicitor or other independent
legal adviser before accepting this letter.

 

38

 

SCHEDULE 1

 

PAYMENT SYSTEMS

 

1.                                      BACS Facility

 

1.1.                              BACS Limit
£200,000

 

1.2.                              Purpose

 

The BACS facility may only
be used by the Borrowers to make fund transfers up to an aggregate at any time
of the amount of the BACS Limit utilising the Bankers Automated Clearing
System.  The Borrower may use the BACS
facility to make such fund transfers, subject to sufficient funds being made
available by the Borrowers to cover the BACS payments by close of business on
the same day without exceeding the Overdraft Limit.

 

1.3.                              Terms and
Conditions

 

The BACS facility shall be
made available to the Borrowers subject to:-

 

1.3.1.                     the terms and
conditions of the Bankers Automated Clearing System operated by BACS Limited;
and

 

1.3.2.                     its rules of operation as agreed
between BoS and the Borrowers from
time to time.

 

2.                                      General

 

Throughout the duration of
the Committed Working Capital, BoS
shall be entitled to vary both the limit and the terms and conditions referred
to above in relation to the Payment Systems by notice to the Borrowers.

 

39

 

SCHEDULE 2

 

DEFINITIONS AND INTERPRETATION

 

1.                                      Definitions

 

“BoS” means The Governor and Company of
the Bank of Scotland, incorporated by Act of Parliament and having its head
office at The Mound, Edinburgh EH1 1YZ and its successors, assignees and
transferees.

 

“Group” means the Parent and each of its
Subsidiaries which is not dormant and “Group Company” is construed accordingly.

 

“Indemnified
Events”
means all actions, suits, proceedings, claims, demands, liabilities, costs,
expenses, losses, damages and charges whatsoever (except those arising as a
result of the gross negligence or wilful misconduct of BoS) which may occur in relation to or
arising out of any utilisations of the Committed Working Capital or the Payment
Systems made available under this letter.

 

“Maturity
Date” means
the anniversary of the date of this letter

 

“Review
Date” means
the Business Day immediately preceding each anniversary of the date of this
letter (or such other date as BoS
may from time to time notify to the Parent).

 

“Security
Documents”
means any security documents (including any guarantees) granted to BoS by any Group Company or any other
person in respect of the Borrowings of the Group from time to time.

 

“Term Loan
Facility  Letter” means the term loan facility
letter entered into between the Parent and BoS
dated 27 September 2004 in relation to term loan facilities, and the expression
“Term Loan” shall be construed accordingly.

 

“Treasury” means HBOS Treasury Services plc
(registered number 2692890) having its registered office at 33 Old Broad
Street, London, EC2N 1HZ.

 

2.                                      Definitions in Committed Facility
Letter

 

Terms defined in the
Committed Facility Letter shall, save where the context otherwise requires or
expressly stated otherwise, have the same meaning when used herein.

 

3.                                      Interpretation

 

Any reference in this letter
to:-

 

(a)                                  statutes, statutory provisions and
other legislation shall include all amendments, substitutions, modifications
and re-enactments for the time being in force and shall include any orders,
regulations, instruments or other subordinate legislation made under the
relevant legislation;

 

(b)                                 “control” of any company shall be
interpreted in accordance with Section 840 of the Taxes Act;

 

(c)                                  “including” shall not be construed as
limiting the generality of the words preceding it;

 

40

 

(d)                                 any clause, paragraph or schedule  shall be construed as a reference to the
clauses in this letter, the schedules to this letter and the paragraphs in such
schedules;

 

(e)                                  any term or phrase defined in the
Companies Act 1985 (as amended from time to time) shall bear the same meaning
in this letter save that any term used in the definition of “Qualifying Lender”
shall be interpreted as such term is interpreted in accordance with the Taxes
Act;

 

(f)                                    words importing the singular shall
include the plural and vice versa and words denoting any gender shall include
all genders;

 

(g)                                 this letter and to any provisions
of it or to any other document referred to in this letter shall be construed as
references to it in force for the time being and as amended, varied,
supplemented, restated, substituted or novated from time to time;

 

(h)                                 a person is to be construed to
include references to a corporation, firm, company, partnership, joint venture,
unincorporated body of persons, individual or any state or any agency of a
state, whether or not a separate legal entity;

 

(i)                                     any person is to be construed to
include that person’s assignees or transferees or successors in title, whether
direct or indirect;

 

(j)                                     any word or phrase includes all
derivations thereof;

 

(k)                                  any “associated person” means, in
relation to a person, a person who is either acting in concert (as defined in
the City Code on Takeovers and Mergers) with that person or is a connected
person (as defined in section 839 of the Taxes Act) of that person;

 

(l)                                     the “exposure” of BoS (or any other member of BoS Group) means, in relation to any
guarantee, bond, forward foreign exchange contract or other utilisation, the
amount determined by BoS to be its
liability (actual or contingent) in respect thereof (or, if applicable, the
liability of such other member of BoS Group).

 

Clause headings are for ease
of reference only and are not to affect the interpretation of this letter.

 

41

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