Document:

exv10w21

 

EXHIBIT 10.21

FOURTH AMENDMENT TO CREDIT AND SECURITY AGREEMENT

     This Fourth Amendment, dated as of May 1, 2006, is made by and among ZAREBA SYSTEMS, INC.,
f/k/a/ Waters Instruments, Inc., a Minnesota corporation (“Zareba Systems”), WATERS MEDICAL
SYSTEMS, INC., a Minnesota corporation (“Waters Medical Systems”), ZAREBA SECURITY, INC., a
Minnesota corporation (“Zareba Security”), and WELLS FARGO BANK, NATIONAL ASSOCIATION,
acting through its WELLS FARGO BUSINESS CREDIT operating division (the “Lender”).

Recitals

     Zareba Systems and the Lender are parties to a Credit and Security Agreement dated as of
September 7, 2004, as amended by a First Amendment to Credit and Security Agreement, dated as of
April 29, 2005, by the Second Amendment to Credit and Security Agreement dated as of December 23,
2005 (pursuant to which Waters Medical Systems was made part of the Borrower), and by the Third
Amendment to Credit and Security Agreement dated as of February 22, 2006 (which, as the same is
amended hereby, shall be the “Credit Agreement”). Capitalized terms used in these recitals
have the meanings given to them in the Credit Agreement unless otherwise specified.

     Zareba Systems has requested the Lender to consent to the organization of Zareba Security as a
new wholly owned subsidiary of Zareba Systems, and to the transfer to Zareba Security all of Zareba
Systems’ right, title and interest in and to the assets, subject to all of the liabilities,
comprising Zareba Systems’ security business.

     NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements
herein contained, it is agreed as follows:

     1. Defined Terms. Capitalized terms used in this Fourth Amendment that are defined in
the Credit Agreement shall have the same meanings as defined there, unless otherwise defined
herein.

     2. “Borrower” Definition; Security Interest; Borrowing Base. The term
“Borrower” shall for all purposes as used herein and in the Credit Agreement and in any
other Loan Document, refer to Zareba Systems, Waters Medical Systems and Zareba Security. From and
after the date of this Fourth Amendment (a) Zareba Systems, Waters Medical Systems and Zareba
Security will be jointly and severally liable for all Obligations, whether now existing or
hereafter created or incurred, and whether originally owed to a different party to the Credit
Agreement or to the Lender in a different capacity, and (b) Zareba Security will have granted to
the Lender a security interest in and to all the Collateral owned by it as security for the payment
and performance of all Obligations in accordance with Article III of the Credit Agreement.
Collateral owned by Zareba Security will be included in the Borrowing Base to the extent it
otherwise satisfies the requirements therefor.

 

 

     3. No Other Changes. Except as explicitly amended by this Amendment, all of the terms
and conditions of the Credit Agreement shall remain in full force and effect and shall apply to any
advance or letter of credit thereunder.

     4. Amendment to Exhibit D. Exhibit D to the Credit Agreement is hereby amended by
adding Zareba Security as a signatory thereto.

     5. Consent to Formation of Zareba Security; New Schedule 5.5. The Lender consents to
the Borrower’s formation of Zareba Security as a wholly-owned subsidiary of Zareba Systems and to
the transfer of certain assets by Zareba Systems to Zareba Security, subject to such transactions
conforming to the following requirements, and only upon the satisfaction of conditions set forth
below:

     A. Zareba Security’s business operations shall be limited to conducting the same
activities that the security division of Zareba Systems previously conducted;

     B. The only assets that have been transferred from Zareba Systems to Zareba Security
shall be Accounts resulting from sales by the security division of Zareba Systems, and
Inventory, Equipment and any specified intellectual property used exclusively in connection
with business activities formerly performed by the security division of Zareba Systems
(“Transfer Assets”); and

     C. The Transfer Assets will be transferred effective May 1, 2006 pursuant to documents
in the form of Exhibit A hereto, and no other assets of Zareba have been or will be
transferred by Zareba Systems to Zareba Security.

     D. The revenue of the security division of Zareba Systems for the period from January
1, 2005 to April 30, 2006 was not greater than $500,000.00 and the book value of the
Transfer Assets as of April 30, 2006, was not greater than $250,000.00.

Upon the effectiveness of this consent, Schedule 5.5 of the Credit Agreement is hereby amended in
its entirety to conform to the form attached hereto as Schedule 5.5. The Lender’s consent under
this Section 5 is conditioned upon and will be effective only after Lender has received all of the
instruments and documents required to be delivered by each of Zareba Systems, Waters Medical
Systems and Zareba Security under Section 7 hereof.

     6. Effectiveness; Post-Execution Covenants. This Fourth Amendment shall be effective
as of May 1, 2006 upon execution hereof by Zareba Systems, Waters Medical Systems and Zareba
Security, and delivery hereof to the Lender. Not later than May 31, 2006, Borrower shall deliver
to the Lender each of the following, each in substance and form acceptable to the Lender in its
sole discretion:

     A. A Certificate of the Secretary or Assistant Secretary of Zareba Systems certifying
(i) as to the resolutions of the Board of Directors of Zareba Systems approving the
execution and delivery of this Fourth Amendment, (ii) to the fact that the articles of
incorporation and bylaws of Zareba Systems, which were certified and delivered to the Lender
pursuant to the Certificate of Authority of Zareba Systems’ secretary or assistant secretary
dated as of February 22, 2006 continue in full force and effect
and have not been amended or otherwise modified), and

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(iii) that the Officers and agents of Zareba
Systems who have been certified to the Lender, pursuant to the Certificate of Authority of
Zareba Systems’ secretary or assistant secretary dated as of February 22, 2006 as being
authorized to sign and to act on behalf of Zareba Systems continue to be so authorized or
setting forth the sample signatures of each of the Officers and agents of Zareba Systems
authorized to execute and deliver this Fourth Amendment and all other documents, agreements
and certificates on behalf of Zareba Systems.

     B. A Certificate of the Secretary or Assistant Secretary of Waters Medical Systems
certifying (i) as to the resolutions of the Board of Directors of Waters Medical Systems
approving the execution and delivery of this Fourth Amendment, (ii) to the fact that the
articles of incorporation and bylaws of Waters Medical Systems, which were certified and
delivered to the Lender pursuant to the Certificate of Authority of the Borrower’s secretary
or assistant secretary dated as of February 22, 2006 continue in full force and effect and
have not been amended or otherwise modified except as set forth in the Certificate to be
delivered, and (iii) that the Officers and agents of Waters Medical Systems who have been
certified to the Lender, pursuant to the Certificate of Authority of Waters Medical Systems’
secretary or assistant secretary dated as of February 22, 2006 as being authorized to sign
and to act on behalf of Waters Medical Systems continue to be so authorized or setting forth
the sample signatures of each of the Officers and agents of Waters Medical Systems
authorized to execute and deliver this Fourth Amendment and all other documents, agreements
and certificates on behalf of Waters Medical Systems.

     C. A certificate of Zareba Security’s Secretary or Assistant Secretary certifying that
attached to or set forth in such certificate are (i) the resolutions of Zareba Security’s
Directors and, if required, Owners, authorizing the execution, delivery and performance of
this Fourth Amendment and the documents required herein, (ii) true, correct and complete
copies of Zareba Security’s Constituent Documents, and (iii) the names and positions of the
Officers and Directors of Zareba Security authorized to execute and deliver this Fourth
Amendment and the other documents required herein and examples of their signatures.

     D. An amended and restated Revolving Note (or other satisfactory joinder of Zareba
Security as an obligor thereunder) executed by Zareba Systems, Waters Medical Systems and
Zareba Security.

     E. An amended and restated Real Estate Term Note (or other satisfactory joinder of
Zareba Security as an obligor thereunder) executed by Zareba Systems, Waters Medical Systems
and Zareba Security.

     F. An amended and restated Equipment Term Note (or other satisfactory joinder of Zareba
Security as an obligor thereunder) executed by Zareba Systems, Waters Medical Systems and
Zareba Security.

     G. An amended and restated Capex Term Note (or other satisfactory joinder of Zareba
Security as an obligor thereunder) executed by Zareba Systems, Waters Medical Systems and
Zareba Security.

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     H. A pledge agreement in form satisfactory to the Lender made by Zareba Systems
pursuant to which all of the issued and outstanding capital stock of Waters Medical Systems
and Zareba Security are pledged to the Lender as security for the Obligation.

     I. Any item described in Section 4.1(d)-(i) of the Credit Agreement, to the extent
applicable to Zareba Security, or a certificate executed thereby stating such provisions are
not applicable.

     J. A UCC Financing Statement filed with the Secretary of State for the State of
Minnesota perfecting the Lender’s interest in all assets of Zareba Security.

     K. A UCC financing search showing that Lender holds a first priority perfected security
interest in all assets of Zareba Security.

     L. Execution and delivery by Zareba Security of agreements substantially similar to, or
joinders to, the agreements referenced in Section 4.1(k)-(m) of the Credit Agreement, in
either case as required by and satisfactory to the Lender.

     M. A current certificate issued by the Secretary of State of Minnesota, certifying that
Zareba Security is in compliance with all applicable organizational requirements of the
State of Minnesota.

     N. Evidence that Zareba Security 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.

     O. A Customer Identification Information form and such other forms and verification as
Lender may need from Zareba Security to comply with the U.S.A. Patriot Act.

     P. Certificates of the insurance for Zareba Security as required under the Credit
Agreement, 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.

     Q. Payment of the costs and expenses described in Section 12.

     R. Such other matters as the Lender may require.

Failure by the Borrower to deliver any of the foregoing when required or perform any other
obligation hereunder as required hereby will constitute an Event of Default under the Credit
Agreement.

     7. Representations and Warranties. The Borrower hereby represents and warrants to the
Lender as follows:

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     A. The Borrower has all requisite power and authority to execute this Amendment and to
perform all of its obligations hereunder, and this Fourth Amendment has been duly executed
and delivered by the Borrower and constitutes the legal, valid and binding obligation of the
Borrower, enforceable in accordance with its terms.

     B. The execution, delivery and performance by the Borrower of this Fourth Amendment
have been duly authorized by all necessary corporate action and do not (i) require any
authorization, consent or approval by any governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, (ii) violate any provision of any
law, rule or regulation or of any order, writ, injunction or decree presently in effect,
having applicability to the Borrower, or the articles of incorporation or by-laws of the
Borrower, or (iii) result in a breach of or constitute a default under any indenture or loan
or credit agreement or any other agreement, lease or instrument to which the Borrower is a
party or by which it or its properties may be bound or affected.

     C. The statements set forth in Section 5.A.-D. are true and correct as of May 1, 2006.

     D. All of the representations and warranties contained in Article V of the Credit
Agreement are correct on and as of the date hereof as though made on and as of such date,
except to the extent that such representations and warranties relate solely to an earlier
date.

     8. References. All references in the Credit Agreement to “this Agreement” shall be
deemed to refer to the Credit Agreement as amended hereby; and any and all references in the
Security Documents to the Credit Agreement shall be deemed to refer to the Credit Agreement as
amended hereby.

     9. No Waiver. The execution of this Fourth Amendment and acceptance of any documents
related hereto shall not be deemed to be a waiver of any Default or Event of Default under the
Credit Agreement or breach, default or event of default under any Security Document or other
document held by the Lender, whether or not known to the Lender and whether or not existing on the
date of this Fourth Amendment.

     10. Release. The Borrower hereby absolutely and unconditionally releases and forever
discharges the Lender, and any and all participants, parent corporations, subsidiary corporations,
affiliated corporations, insurers, indemnitors, successors and assigns thereof, together with all
of the present and former directors, officers, agents and employees of any of the foregoing, from
any and all claims, demands or causes of action of any kind, nature or description, whether arising
in law or equity or upon contract or tort or under any state or federal law or otherwise, that the
Borrower has had, now has or has made claim to have against any such person for or by reason of any
act, omission, matter, cause or thing whatsoever arising from the beginning of time to and
including the date of this Fourth Amendment, whether such claims, demands and causes of action are
matured or unmatured or known or unknown.

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     11. Costs and Expenses. The Borrower hereby reaffirms its agreement under the Credit
Agreement to pay or reimburse the Lender on demand for all costs and
expenses incurred by the Lender in connection with the Loan Documents, including without limitation all
reasonable fees and disbursements of legal counsel. Without limiting the generality of the
foregoing, the Borrower specifically agrees to pay all fees and disbursements of counsel to the
Lender for the services performed by such counsel in connection with the preparation of this Fourth
Amendment and the documents and instruments incidental hereto. The Borrower hereby agrees that the
Lender may, at any time or from time to time in its sole discretion and without further
authorization by the Borrower, make a loan to the Borrower under the Credit Agreement, or apply the
proceeds of any loan, for the purpose of paying any such fees, disbursements, costs and expenses.

     12. Miscellaneous. This Fourth Amendment may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed an original and all of
which counterparts, taken together, shall constitute one and the same instrument.

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

	 	 	 	 	 	 	 	 	 	 	 
	ZAREBA SYSTEMS, INC., a Minnesota	 	 	 	WATERS MEDICAL SYSTEMS, INC., a	 	 
	corporation	 	 	 	Minnesota corporation	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	By:

	 	/s/Jerry Grabowski
 

	 	 	 	By:
	 	/s/Jerry Grabowski
 

	 	 
	Its: President & CEO	 	 	 	Its: President	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	ZAREBA SECURITY, INC., a Minnesota
corporation	 	 	 	WELLS FARGO BANK, NATIONAL ASSOCIATION	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	By:

	 	/s/Jerry Grabowski
 

	 	 	 	By:
	 	/s/ Brian J. Waldinger
 

	 	 
	Its: President	 	 	 	 	 	Its Vice President	 	 

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EXHIBIT A

TRANSFER DOCUMENTS

 

 

Schedule 5.5 to Credit and Security Agreement

SUBSIDIARIES

	•	 	Zareba Systems of Canada, Ltd., a corporation formed under the laws of the Province
of Ontario, Canada
	 
	•	 	Zareba Systems Europe Limited, a private company limited by shares incorporated in
the United Kingdom
	 
	•	 	No. 549 Leicester Limited, a private company limited by shares incorporated in the
United Kingdom
	 
	•	 	Rutland Electric Fencing Co. Limited, a private company limited by shares
incorporated in the United Kingdom
	 
	•	 	Rutland Electric Fencing Co. (Scotland) Limited, a private company limited by shares
incorporated in Scotland
	 
	•	 	Electric Shepherd Products Limited, a private company limited by shares incorporated
in the United Kingdom
	 
	•	 	Waters Medical Systems, Inc., a corporation formed under the laws of the State of
Minnesota
	 
	•	 	Zareba Security, Inc., a corporation formed under the laws of the State of Minnesotaexv10w24

 

Exhibit 10.24

TRANSITION EMPLOYMENT AGREEMENT AND RELEASE

PARTIES:

      
    Waters Instruments, Inc.         
                
                
                
                
                
                
                
 (“Waters”)

      
    Gregory J. Anshus          
                
                
                
                
                
                
                
          (“Anshus”)

RECITALS:

     A. Anshus is employed by Waters as Vice President and Chief Financial Officer.

     B. Waters is consolidating and relocating financial reporting functions, which will result in
termination of Anshus’ employment and officership with Waters.

     C. Waters and Anshus desire to continue the employment relationship for a specified length of
time so Anshus may assist with the transition until after Waters hires a new Chief Financial
Officer.

     D. After negotiations, Waters and Anshus reached an agreement regarding Anshus’ employment
with and separation from Waters.

     E. Waters and Anshus desire to set forth their understanding and agreement with respect to the
terms of Anshus’ employment with and separation from Waters.

     NOW, THEREFORE, in consideration of the mutual covenants and promises made by and between the
parties, the receipt and adequacy of which is acknowledged, Waters and Anshus hereby agree as
follows:

AGREEMENTS:

ARTICLE 1

TERM OF EMPLOYMENT AND AGREEMENT

     1.1) Term of Employment. The term of Anshus’ employment under this Transition
Employment Agreement and Release (the “Agreement” or the “Transition Agreement”) shall commence
upon both parties’ signing of this Agreement and shall continue until terminated as described in
this Agreement.

     1.2) Employment and Automatic Termination. Unless terminated earlier as provided for
elsewhere in this Agreement, Anshus’ employment with Waters shall continue until 30 calendar days
following the start date for Waters’ new Chief Financial Officer who will succeed Anshus, at which
time it will automatically terminate. By signing this Agreement, Anshus hereby voluntarily resigns
(a) his officership with Waters, effective upon the start date for Waters’ new Chief Financial
Officer, and (b) his employment with Waters, effective 5:00 p.m. on the 30th calendar
day immediately following the start date for Waters’ new Chief Financial Officer; provided,
however, that Anshus’ employment may

 

 

be terminated earlier pursuant to Article 3 or Section 4.3 of this
Agreement. The date of termination of Anshus’ employment, whether automatically pursuant to this
Section 1.2 or earlier under another section of this Agreement, shall be referred to as the
“Termination Date.” The period from the date both parties sign this Agreement through the
Termination Date shall be referred to as the “Term of Employment.”

     1.3) Expectations of Employment. Anshus shall be employed by Waters in accordance
with the terms and conditions set forth in this Transition Agreement. Anshus and Waters agree that
this Transition Agreement supersedes and terminates all oral and written terms relating to Anshus’
employment with Waters, including but not limited to any and all compensation, bonus, and incentive
plans, programs, or agreements. Anshus acknowledges and agrees that Anshus has no expectations of
employment other than those specifically set forth in this Transition Agreement.

ARTICLE 2

DUTIES, COMPENSATION, AND BENEFITS

     2.1) Duties. Anshus shall, until the start date for Waters’ new Chief Financial
Officer, continue to perform his ordinary and customary duties as Chief Financial Officer and those
duties as assigned by Waters from time to time. Upon the start date for Waters’ new Chief
Financial Officer through the Termination Date, Anshus shall assist Waters with the transition and
assist the new Chief Financial Officer in assuming the duties of his/her office, along with
performing those duties as assigned by Waters from time to time. During the Term of Employment,
Anshus shall not enter into any contract for or on behalf of Waters, except as expressly authorized
in writing by Waters.

     2.2) Compensation and Benefits. Subject to the provisions for termination contained
in this Agreement, during the Term of Employment Waters shall continue to pay Anshus his current
base salary, at a rate of $9,776.43 per month, less applicable deductions and withholding (“Base
Salary”). During the Term of Employment, Anshus shall also continue to receive his Waters’
employee benefits for which he is otherwise eligible and enrolled, on the same terms and conditions
as Waters provides such benefits to other full-time Waters employees. Anshus shall not be entitled
to any other compensation or benefits except as expressly set forth in this Agreement.

     2.3) Bonus. Anshus shall not earn or be eligible to earn a bonus under any 2006 bonus
plan, or under any other bonus plan or agreement. Anshus earned and was paid a performance bonus
for Fiscal Year 2005 (“Performance Bonus”) but, because certain targets and objectives were not met
for Fiscal Year 2005, Anshus was not eligible to earn the full amount of his 2005 bonus. In
consideration for and anticipation of Anshus’ signing this Agreement, Waters has paid Anshus (and
Anshus hereby acknowledges having received such payment) a “Stay Bonus” equal to the difference
between the full amount of the 2005 bonus Anshus was eligible to earn (i.e., Twenty Nine Thousand
Three Hundred Twenty Nine and 30/100 Dollars ($29,329.30), less applicable deductions and
withholding) and the Performance Bonus. Anshus shall not be entitled to and shall repay such Stay
Bonus if, prior to the
30th calendar day following the start date for Waters’ new Chief Financial Officer, Anshus (a) resigns his employment pursuant to Section 3.3, or (b) is
terminated by Waters for Cause pursuant to Section 3.1, or (c) is terminated pursuant to Section
4.3.

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     2.4) Stock Options. During his employment with Waters, Anshus has been granted
various Waters stock options. The terms of such stock options are and shall continue to be
governed by the respective stock option agreements and the applicable stock option plans. Anshus
shall not receive or be eligible to receive any additional grants of stock options during the Term
of Employment. Waters shall pay to Anshus on the Termination date, in a lump sum (subject to any
required taxes and withholding), all funds Anshus has had withheld from his compensation by Waters
this calendar year for the purpose of purchasing Waters’ stock pursuant to the 1997 Associates
Stock Purchase Plan or any subsequent Company stock purchase plan.

     2.5) Accrued Vacation. If Anshus’ employment automatically terminates pursuant to
Section 1.2 on the 30th calendar day following the start date for Waters’ new Chief
Financial Officer, or if his employment is terminated by Waters without Cause pursuant to Section
3.2 before the end of such time period, then Waters shall pay Anshus on the first payroll date
following the Termination Date the value of his accrued, unused vacation at his regular rate of
pay, less applicable deductions and withholding, up to a maximum of 288 hours.

ARTICLE 3

TERMINATION OF EMPLOYMENT

     3.1) Termination for Cause. Waters may terminate Anshus’ employment at any time for
Cause. For purposes of this Agreement, “Cause” shall include but not be limited to dishonesty,
fraud, criminal activity, or conduct that reflects poorly upon Waters. If Anshus’ employment is
terminated by Waters for Cause, then (a) Anshus shall not earn, and shall immediately repay, the
Stay Bonus, (b) Anshus shall not be offered or entitled to the severance payment described in
Section 3.4 below, and (c) all compensation and benefits shall immediately terminate effective upon
the Termination Date.

     3.2) Termination without Cause. Waters may terminate Anshus’ employment at any time
without Cause; provided, however that if Waters terminates Anshus’ employment without Cause on or
before the 30th calendar day following the start date for Waters’ new Chief Financial
Officer, then Waters shall (a) permit Anshus to retain the Stay Bonus previously paid to him, (b)
continue to pay Anshus his current Base Salary for the period from his Termination Date through the
30th calendar day following the start date for Waters’ new Chief Financial Officer, (c)
continue to pay its ordinary share of Anshus’ insurance premiums for coverage under Waters’ group
health insurance plan for the period from the Termination Date through the 30th calendar
day following the start date for Waters’ new Chief Financial Officer, and (d) offer Anshus the
severance payment described in Section 3.4 below subject to his signing and satisfying the terms
and conditions contained in the Severance Agreement and Release of Claims.

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     3.3) Resignation. Anshus may terminate (i.e., resign) his employment at any time. If
Anshus resigns his employment prior to the 30th calendar day following the start date
for Waters’ new Chief Financial Officer, then (a) Anshus shall not earn, and shall immediately
repay, the Stay Bonus, (b) Anshus shall not be offered or entitled to the severance payment
described in Section 3.4 below, and (c) all compensation and benefits shall immediately terminate
effective upon the Termination Date.

     3.4) Severance Payment. If (1) Anshus signs and does not rescind any part of this
Transition Agreement, and (2) Anshus’ employment under this Transition Agreement subsequently
terminates either automatically pursuant to Section 1.2 or without Cause pursuant to Section 3.2,
and (3) within 21 calendar days of the Termination Date Anshus executes the Severance Agreement and
Release of Claims attached to this Transition Agreement as Exhibit A and does not rescind any part
thereof, then Waters shall provide Anshus with the severance pay described in Exhibit A.

ARTICLE 4

RELEASE OF CLAIMS

     4.1) Release of Claims. Specifically in consideration of Waters’ agreement to employ
and compensate Anshus as described in this Transition Agreement, to which Anshus would not
otherwise be entitled, by signing this Transition Agreement Anshus, for himself and anyone who has
or obtains legal rights or claims through Anshus, agrees to the following:

          a. Anshus hereby does release, agree not to sue, and forever discharge Waters (as defined
below) of and from any and all manner of claims, demands, actions, causes of action, administrative
claims, liability, damages, claims for punitive or liquidated damages, claims for attorney’s fees,
costs and disbursements, individual or class action claims, or demands of any kind whatsoever,
Anshus has or might have against them or any of them, whether known or unknown, in law or equity,
contract or tort, arising out of or in connection with Anshus’ employment with Waters, or the
termination of that employment, or otherwise, and however originating or existing, from the
beginning of time through the date of Anshus’ signing this Agreement.

          b. This release includes, without limiting the generality of the foregoing, any claims Anshus
may have for wages, bonuses, commissions, penalties, deferred compensation, the granting of stock
or stock options, vacation pay, separation pay and/or benefits, defamation, invasion of privacy,
negligence, emotional distress, improper discharge (based on contract, common law, or statute,
including any federal, state or local statute or ordinance prohibiting discrimination or
retaliation in employment), violation of the United States Constitution, the Minnesota
Constitution, the Minnesota Human Rights Act, Minn. Stat. § 363A.01 et seq., the
Age Discrimination in Employment Act, 29 U.S.C. § 621 et seq., Title VII of the
Civil Rights Act, 42 U.S.C. § 2000e et seq., the Americans with Disabilities Act,
42 U.S.C. § 12101 et seq., the Employee Retirement Income Security Act of 1976, 29
U.S.C. § 1001 et seq., the Family and Medical Leave Act, 29 U.S.C. § 2601
et seq., the Sarbanes-

4

 

Oxley Act, 15 U.S.C. § 7201 et seq., the
National Labor Relations Act, 29 U.S.C. § 151 et seq., the Worker Adjustment and Retraining
Notification Act, 29 U.S.C. § 2101 et seq., any claim arising under Minn. Stat. Chapters 177 and
181, Minn. Stat. § 176.82, and any claim for retaliation or discrimination based on sex, race,
color, creed, religion, age, national origin, marital status, sexual orientation, disability,
status with regard to public assistance, or other protected class, or sexual or other harassment.
Anshus hereby waives any and all relief not provided for in this Transition Agreement. Anshus
understands and agrees that, by signing this Transition Agreement, Anshus waives and releases any
past, present, or future claim to employment with Waters other than that expressly provided for in
this Transition Agreement and Anshus agrees not to seek employment with Waters.

          c. Anshus affirms that he has not caused or permitted, and to the full extent permitted by law
will not cause or permit to be filed, any charge, complaint, or action of any nature or type
against Waters, including but not limited to any action or proceeding raising claims arising in
tort or contract, or any claims arising under federal, state, or local laws, including
discrimination laws. If Anshus files, or has filed on Anshus’ behalf, a charge, complaint, or
action, Anshus agrees that the payments and benefits described in this Agreement are in complete
satisfaction of any and all claims in connection with such charge, complaint, or action and Anshus
waives, and agrees not to take, any award of money or other damages from such charge, complaint, or
action.

          d. Anshus is not, by signing this Transition Agreement, releasing or waiving (1) any rights or
claims that may arise after this Transition Agreement is signed, (2) the compensation and benefits
specifically promised to Anshus under Articles 2 and 3 of this Transition Agreement, or the
severance payment conditionally promised under Section 2 of Exhibit A, (3) the right to institute
legal action for the purpose of enforcing the provisions of this Transition Agreement, (4) the
right to apply for State unemployment compensation benefits, or (5) any right to indemnification
and/or insurance coverage, if any, Anshus may have with respect to any claims made against him in
his capacity as an employee and/or officer of Waters.

          e. Waters, as used in this Section 4.1, shall mean Waters Instruments, Inc. and its
subsidiaries, divisions, affiliates, insurers, and its and their present and former officers,
directors, shareholders, trustees, employees, agents, attorneys, representatives and consultants,
and the successors and assigns of each, whether in their individual or official capacities, and the
current and former trustees or administrators of any pension or other benefit plan applicable to
the employees or former employees of Waters, in their official and individual capacities.

     4.2) Notice of Right to Consult Attorney and Twenty-One (21) Calendar Day Consideration
Period. By signing this Agreement, Anshus acknowledges and agrees that Waters has informed him
by this Agreement that (1) he has the right to consult with an attorney of his choice prior to
signing this Agreement, and (2) he is entitled to twenty-one (21) calendar days from the receipt of
this Agreement to consider whether the terms are acceptable to him. Waters encourages Anshus to
use the full 21-day period to consider this Agreement but Anshus has the right, if he chooses, to
sign this Agreement prior to the expiration of the twenty-one (21) day period.

5

 

Changes to this Agreement, whether or not material, will not restart this twenty-one (21) day
consideration period.

     4.3) Notification of Rights under the Minnesota Human Rights Act (Minn. Stat. Chapter
363A) and the Federal Age Discrimination in Employment Act (29 U.S.C. § 621 et seq.). Anshus
is hereby notified of his right to rescind the release of claims contained in Article 4 with regard
to claims arising under the Minnesota Human Rights Act, Minnesota Statutes Chapter 363A, within
fifteen (15) calendar days of his signing this Agreement, and with regard to his rights arising
under the federal Age Discrimination in Employment Act, 29 U.S.C. § 621 et seq.,
within seven (7) calendar days of his signing this Agreement. The two rescission periods shall run
concurrently. In order to be effective, the rescission must

          a. Be in writing; and

          b. Delivered to Gerald Grabowski, Waters Instruments, Inc., Suite 102, 13705 — 26th Avenue
North, Plymouth, MN 55441 by hand or mail within the required period; and

          c. If delivered by mail, the rescission must be postmarked within the required period,
properly addressed to Gerald Grabowski, as set forth above, and sent by certified mail, return
receipt requested.

This Agreement will be effective upon the expiration of the 15-day period without rescission.
Anshus understands that if he rescinds any part of this Transition Agreement in accordance with
this Section 4.3, Anshus shall not receive the payments and benefits described in this Transition
Agreement, shall be required to immediately repay the Stay Bonus, and his employment with Waters
shall immediately terminate.

ARTICLE 5

CONFIDENTIALITY

     5.1) Confidential Information. “Confidential Information” means any information not
generally known or readily ascertainable by Waters’ competitors or the general public and includes,
but is not limited to, use of or customization to computer, software, and/or internet applications;
formulas and algorithms; trade secrets; methods, procedures, or techniques pertaining to the
business of Waters; marketing plans; sales analyses; financial information; client names or other
information; the identities and/or information regarding actual and/or prospective strategic
partners and/or investors; research and development data; and notes, memoranda, notebooks, and
records or documents that are created, handled, seen, or used by Anshus in the course of
employment. Confidential Information does not include information that Anshus can demonstrate by
reliable, corroborated documentary evidence (1) is generally available to the public or (2) became
generally available through no act or failure to act by Anshus. Anshus shall not at any time
(including after termination of employment) use, disclose, duplicate, record, or

6

 

in any other
manner reproduce in whole or in part any Confidential Information. Anshus acknowledges that use or disclosure of any Confidential Information in
violation of this Agreement would have a materially detrimental effect upon Waters, the monetary
loss from which would be difficult, if not impossible, to measure. Anshus acknowledges and agrees
that all documents and materials relating to Waters’ business are the sole property of Waters.
Upon the Termination Date, or earlier if requested by Waters, Anshus shall return to Waters all
Waters’ property, including but not limited to, keys, cell phone, computer, computer accessories,
and software, all Confidential Information, documents, and materials, whether on computer disc,
hard drive or other form, and all copies thereof, which in any manner relate to Waters.

ARTICLE 6

MISCELLANEOUS

     6.1) Modifications. This Agreement supersedes all prior agreements and understandings
between the parties, whether oral or in writing, relating to Anshus’ employment, compensation,
benefits, termination of employment, and/or separation/severance payments and/or benefits. This
Transition Agreement may not be changed or terminated orally. No modification, termination or
attempted waiver of any of the provisions of this Agreement shall be valid unless in writing signed
by the both parties.

     6.2) Non-Admission. It is expressly understood that this Agreement does not
constitute, nor shall it be construed as an admission by Waters or Anshus of any liability or
unlawful conduct whatsoever. Waters and Anshus specifically deny any liability or unlawful
conduct.

     6.3) Governing Law. This Transition Agreement and all questions arising in connection
with it shall be governed by the laws of the State of Minnesota.

     6.4) Survival. The parties specifically agree that Articles 4 and 5 shall survive the
termination of Anshus’ employment and termination of this Agreement.

     6.5) Assignment. This Transition Agreement is personal to Anshus and may not be
assigned by him without the written agreement of Waters. The rights and obligations of this
Transition Agreement shall automatically inure to the successors and assigns of Waters.

     6.6) Severability. If a court finds any term of this Agreement to be invalid,
unenforceable, or void, the parties agree that the court shall modify such term to make it
enforceable to the maximum extent possible. If the term cannot be modified, the parties agree that
the term shall be severed and all other terms of this Agreement shall remain in effect.

     6.7) Acknowledgment of Reading and Understanding. By signing this Agreement, Anshus
acknowledges that he has read this Release, including the release of claims contained in Article 4,
and understands that the release of claims is a full and final release of all claims Anshus
may have against Waters and the other entities and individuals
covered by the release. By signing, Anshus also acknowledges and agrees that he has have entered into this Agreement knowingly and
voluntarily.

7

 

     IN WITNESS WHEREOF, the parties have executed this Agreement in the manner appropriate to
each.

	 	 	 	 	 	 	 
	 	 	WATERS INSTRUMENTS, INC.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ G.W Grabowski
 

     Gerald Grabowski
	 	 
	 

	 	 	 	     Its President	 	 
	 
	 	 	 	 	 	 
	 	 	Date: 10/27/05	 	 
	 
	 	 	 	 	 	 
	 

	 	/s/
	 	Gregory J. Anshus
 

	 	 
	 	 	Gregory J. Anshus	 	 
	 
	 	 	 	 	 	 
	 	 	Date: 10/27/05	 	 

8

 

EXHIBIT A

SEVERANCE AGREEMENT AND RELEASE OF CLAIMS

PARTIES:

      
    Waters Instruments, Inc.         
                
                
                
                
                
                
                
 (“Waters”)

      
    Gregory J. Anshus          
                
                
                
                
                
                
                
          (“Anshus”)

RECITALS:

     A. Waters and Anshus entered into a Transition Employment Agreement and Release (the
“Transition Agreement”).

     B. Anshus’ employment with Waters subsequently terminated either (1) automatically pursuant to
Section 1.2 of the Transition Agreement or (2) without Cause pursuant to Section 3.2 of the
Transition Agreement.

     C. Anshus desires severance pay to assist him with his transition, which Waters is willing to
provide in exchange for a release of claims.

     D. Waters and Anshus desire to set forth their understanding and agreement with respect to the
terms of Anshus’ separation from Waters.

     NOW, THEREFORE, in consideration of the mutual covenants and promises made by and between the
parties, the receipt and adequacy of which is acknowledged, Waters and Anshus hereby agree as
follows:

     1. End of Employment.

          a. Anshus’ employment and officership with Waters has terminated.

          b. Anshus acknowledges and agrees that he has received his final paycheck, which includes
payment for services through his last day of employment, and that he has received all wages and
benefits owed to him by virtue of his employment with Waters or termination thereof.

          c. Anshus is not eligible for any other payments or benefits except for those expressly
described in this Severance Agreement and Release of Claims (“Release”), provided that Anshus signs
and does not rescind this Release.

9

 

     2. Severance Payment. Specifically in consideration of Anshus’ signing this Release
and subject to the limitations, obligations, and other provisions contained in this Release, and
further provided (1) Anshus signed and did not rescind all or part of the Transition Agreement, and
(2) Anshus’ employment with Waters was not terminated pursuant to Section 4.3 of the Transition
Agreement, for Cause as defined in Section 3.1 of the Transition Agreement, or because of
resignation pursuant to Section 3.3 of the Transition Agreement, and (3) Anshus executes and
returns this Release of Claims within 21 calendar days of the termination of his employment and
does not rescind any part thereof, Waters agrees to pay Anshus nine months’ Base Salary (less
applicable deductions and withholding), to be paid at regular payroll intervals in installments
equal to Anshus’s current paycheck. Notwithstanding the foregoing, no payment shall be made by
Waters pursuant to this Section 2 until after the expiration of the rescission periods set forth in
Section 5 below. Any payments pursuant to this Section 2 that, but for the immediately preceding
sentence, would otherwise have been payable by Waters during the rescission periods shall be paid
by Waters in a lump sum on the first payroll cycle after the expiration of the rescission periods.

     3. Release of Claims. Specifically in consideration of the severance payment
described in Section 2 above, and to which Anshus would not otherwise be entitled, by signing this
Release Anshus, for himself and anyone who has or obtains legal rights or claims through him,
agrees to the following:

          a. Anshus hereby does release, agree not to sue, and forever discharge Waters (as defined
below) of and from any and all manner of claims, demands, actions, causes of action, administrative
claims, liability, damages, claims for punitive or liquidated damages, claims for attorney’s fees,
costs and disbursements, individual or class action claims, or demands of any kind whatsoever,
Anshus has or might have against them or any of them, whether known or unknown, in law or equity,
contract or tort, arising out of or in connection with Anshus’ employment with Waters, or the
termination of that employment, or otherwise, and however originating or existing, from the
beginning of time through the date of Anshus’ signing this Release.

          b. This release includes, without limiting the generality of the foregoing, any claims Anshus
may have for wages, bonuses, commissions, penalties, deferred compensation, the granting of stock
or stock options, vacation pay, separation pay and/or benefits, defamation, invasion of privacy,
negligence, emotional distress, improper discharge (based on contract, common law, or statute,
including any federal, state or local statute or ordinance prohibiting discrimination or
retaliation in employment), violation of the United States Constitution, the Minnesota
Constitution, the Minnesota Human Rights Act, Minn. Stat. § 363A.01 et seq., the
Age Discrimination in Employment Act, 29 U.S.C. § 621 et seq., Title VII of the
Civil Rights Act, 42 U.S.C. § 2000e et seq., the Americans with Disabilities Act,
42 U.S.C. § 12101 et seq., the Employee Retirement Income Security Act of 1976, 29
U.S.C. § 1001 et seq., the Family and Medical Leave Act, 29 U.S.C. § 2601
et seq., the Sarbanes-Oxley Act, 15 U.S.C. § 7201 et seq., the
National Labor Relations Act, 29 U.S.C. § 151 et seq., the Worker Adjustment and
Retraining Notification Act, 29 U.S.C. § 2101 et seq., any claim arising under Minn. Stat. Chapters
177 and 181, Minn. Stat. § 176.82, and any claim for

10

 

retaliation or discrimination based on sex, race, color, creed, religion,
age, national origin, marital status, sexual orientation, disability, status with regard to public
assistance, or other protected class, or sexual or other harassment. Anshus hereby waives any and
all relief not provided for in this Release. Anshus understands and agrees that, by signing this
Release, Anshus waives and releases any past, present, or future claim to employment with Waters
and Anshus agrees not to seek employment with Waters.

          c. Anshus affirms that he has not caused or permitted, and to the full extent permitted by law
will not cause or permit to be filed, any charge, complaint, or action of any nature or type
against Waters, including but not limited to any action or proceeding raising claims arising in
tort or contract, or any claims arising under federal, state, or local laws, including
discrimination laws. If Anshus files, or has filed on Anshus’ behalf, a charge, complaint, or
action, Anshus agrees that the payment described in this Release are in complete satisfaction of
any and all claims in connection with such charge, complaint, or action and Anshus waives, and
agrees not to take, any award of money or other damages from such charge, complaint, or action.

          d. Anshus is not, by signing this Release, releasing or waiving (1) any rights or claims that
may arise after this Release is signed, (2) the payments specifically promised to Anshus under
Article 2 of the Transition Agreement, (3) the severance payment specifically promised to Anshus
under Section 2 of this Release, (4) the right to institute legal action for the purpose of
enforcing the provisions of this Release, (5) the right to apply for State unemployment
compensation benefits, or (6) any right to indemnification and/or insurance coverage, if any,
Anshus may have with respect to any claims made against him in his capacity as an employee and/or
officer of Waters.

          e. Waters, as used in this Section 3, shall mean Waters Instruments, Inc. and its
subsidiaries, divisions, affiliates, insurers, and its and their present and former officers,
directors, shareholders, trustees, employees, agents, attorneys, representatives and consultants,
and the successors and assigns of each, whether in their individual or official capacities, and the
current and former trustees or administrators of any pension or other benefit plan applicable to
the employees or former employees of Waters, in their official and individual capacities.

     4. Notice of Right to Consult Attorney and Twenty-One (21) Calendar Day Consideration
Period. By signing this Release, Anshus acknowledges and agrees that Waters has informed him
by this Release that (1) he has the right to consult with an attorney of his choice prior to
signing this Release, and (2) he is entitled to twenty-one (21) calendar days from the receipt of
this Release to consider whether the terms are acceptable to him. Waters encourages Anshus to use
the full 21-day period to consider this Release but Anshus has the right, if he chooses, to sign
this Release prior to the expiration of the twenty-one (21) day period. Changes to this Release,
whether or not material, will not restart this twenty-one (21) day consideration period.

11

 

     5. Notification of Rights under the Minnesota Human Rights Act (Minn. Stat. Chapter 363A)
and the Federal Age Discrimination in Employment Act (29 U.S.C.
§ 621 et seq.). Anshus is hereby notified of his right to rescind the release of claims contained in Section 3 of this
Release with regard to claims arising under the Minnesota Human Rights Act, Minnesota Statutes
Chapter 363A, within fifteen (15) calendar days of his signing this Release, and with regard to his
rights arising under the federal Age Discrimination in Employment Act, 29 U.S.C. § 621 et
seq., within seven (7) calendar days of his signing this Release. The two rescission
periods shall run concurrently. In order to be effective, the rescission must

          a. Be in writing; and

          b. Delivered to Gerald Grabowski, Waters Instruments, Inc., Suite 102, 13705 — 26th Avenue
North, Plymouth, MN 55441 by hand or mail within the required period; and

          c. If delivered by mail, the rescission must be postmarked within the required period,
properly addressed to Gerald Grabowski, as set forth above, and sent by certified mail, return
receipt requested.

This Release will be effective upon the expiration of the 15-day period without rescission. Anshus
understands that if he rescinds any part of this Release in accordance with this Section 5, Anshus
will not receive the severance payment described in this Release.

     6. Confidentiality. Anshus promises and agrees not to disparage Waters (as defined in
Section 3.e. above) or disclose or discuss, directly or indirectly, in any manner whatsoever, any
information regarding either (1) the contents and/or terms of this Release, or (2) the substance
and/or nature of any dispute between the Waters and any current or former employee (including
Anshus). Anshus agrees that the only people with whom he may discuss this confidential information
are his legal and financial advisors and his spouse, provided they agree to keep the information
confidential, or as otherwise required by law.

     7. Further Assistance. At Waters’ request, Anshus agrees to provide assistance,
cooperation, and/or truthful testimony in connection with any claim, investigation, dispute,
litigation, or proceeding arising out of matters within Anshus’ knowledge and related to Anshus’
employment with Waters. Anshus’ assistance and cooperation shall include, but not be limited to,
providing truthful information, declarations, and/or statements to Waters, meeting with attorneys
or other representatives of Waters, and preparing for and giving depositions or testimony.
Provided, however, that nothing in this Release shall be construed to prevent Anshus from
testifying truthfully and completely at any administrative hearing, deposition, or in court in
response to a lawful subpoena or as otherwise required by law, in any matter involving Waters.
Waters agrees to reimburse Anshus’ reasonable out-of-pocket expenses incurred as a result of
Anshus’ assistance, cooperation, or truthful testimony in response to a request by Waters.

     8. Incorporation. This Release hereby incorporates by reference the terms of the
Transition Agreement previously signed by the parties, including but not limited to the release of
claims contained in Article 4. This Release (including the Transition Agreement incorporated

12

 

herein by reference) contains the sole offer and full agreement between Anshus and Waters relating
to Anshus’ employment with Waters and the termination of such employment and may not be modified,
altered, or changed in any way except by written agreement signed by both parties. The parties
agree that this Release supersedes and terminates any and all other written and oral agreements and
understandings between the parties, including, but not limited to any and all agreements and/or
understandings concerning employment, compensation, benefits, termination of employment, and/or
separation/severance payments and/or benefits, except this Release supplements and does not
supersede the Transition Agreement.

     9. Expiration of Offer. The offer contained in this Release shall expire at 5:00 p.m.
on the twenty-first calendar day following the Termination Date, not counting the Termination Date.
If Waters has not received a signed original of this Release from Anshus by that time, this offer
will be automatically revoked.

     10. Acknowledgment of Reading and Understanding. By signing this Release, Anshus
acknowledges that he has read this Release, including the release of claims contained in Section 3,
and understands that the release of claims is a full and final release of all claims Anshus
may have against Waters and the other entities and individuals covered by the release. By signing,
Anshus also acknowledges and agrees that he has have entered into this Release knowingly and
voluntarily.

     IN WITNESS WHEREOF, the parties have executed this Release in the manner appropriate to each.

	 	 	 	 	 	 	 
	 	 	WATERS INSTRUMENTS, INC.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ G.W. Grabowski
 

     Gerald Grabowski
	 	 
	 

	 	 	 	     Its President	 	 
	 
	 	 	 	 	 	 
	 	 	Date: 1/20/06	 	 
	 
	 	 	 	 	 	 
	 

	 	/s/
	 	Gregory J. Anshus
 

	 	 
	 	 	Gregory J. Anshus	 	 
	 
	 	 	 	 	 	 
	 	 	Date: 1/20/06	 	 

13

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