Document:

Exhibit
10.3

 

RESIDENTIAL
FUNDING CORPORATION

INTERCREDITOR AGREEMENT

(MANUFACTURED HOUSING)

 

September 3,
2004

 

To:                              Residential
Funding Corporation (“Lender”)

8400 Normandale Lake Boulevard, Suite 250

Minneapolis, Minnesota  55437

 

The undersigned (“Creditor”),
creditor of HomeOne Credit Corp. (“Borrower”), desires that Lender extend or
continue to extend such financial accommodations to Borrower as Borrower may
require and as Lender may deem proper. 
For the purpose of inducing Lender to grant, continue or renew such
financial accommodations, and in consideration thereof, Creditor agrees as
follows:

 

1)             That as of the
closing date Borrower is indebted to Creditor in the principal amount of
approximately $22,395,500.00 and Borrower may hereafter be indebted to Creditor
in a lesser or greater amount.

 

2)             That all claims of
Creditor against Borrower now or hereafter existing are and shall be at all
times subject to the terms of this Agreement for as long as any present and
future claims which Lender may have against Borrower (and all extensions,
renewals, modifications, replacements and substitutions of or for the same),
shall exist.

 

a)             That Creditor shall
not (a) except to the extent expressly permitted in Section 4 hereof,
receive payment of or collect, in whole or in part, or sue upon, any claim or
claims now or hereafter existing which Creditor may hold against Borrower; (b)
sell, assign, transfer, pledge, hypothecate or encumber such claim or claims
except subject expressly to this Agreement; (c) enforce any lien Creditor may
now or in the future have on any debt owing by Borrower to Creditor; and/or (d)
join in any petition in bankruptcy, assignment for the benefit of creditors or
creditor’s agreement, except as directed by Lender, so long as any claim of Lender
against Borrower, or commitment of Lender to extend credit to Borrower is in
existence.

 

b)            So long as no event
described in clauses (a) through (d) of Section 6 below (a “Liquidation
Event”) shall have occurred and be continuing and no default shall have
occurred and be continuing in payment or performance of any obligation of
Borrower to Lender and so long as no default under any agreement between Lender
and Borrower would be created by such payments, payments of
interest and principal on the claims of Creditor may be made.  After the occurrence and during the
continuation of a Liquidation Event or of default in payment or performance of
any obligation of Borrower to Lender, no interest and no principal payments on
the claims of Creditor shall be made without the prior written consent of
Lender.

 

c)             In the event that any
Creditor receives a payment from Borrower in violation of the terms of this
Agreement, such Creditor (a) shall hold such money in trust for the benefit of
Lender, (b) shall segregate such payment from (and shall not commingle such
payment with any of) the other funds of such Creditor, and (c) shall forthwith
remit such payment to Lender in the exact form received (but with any necessary
endorsement).

 

d)            In case of (a) any
assignment by Borrower for the benefit of creditors, (b) any bankruptcy
proceedings instituted by or against Borrower, (c) the appointment of any
receiver for Borrower’s business or assets, or (d) any dissolution or winding
up of the affairs of Borrower, Borrower and any assignee, trustee in
bankruptcy, receiver, or other person or persons in charge, are hereby directed
to pay to

 

1

 

Lender the full amount of
Lender’s claim against Borrower before making any payment of principal or
interest to Creditor. 
If Creditor does not file a proper claim or proof of debt in the form
required in such proceeding prior to thirty (30) days before the expiration of
the time to file such claim in such proceedings, then Lender has the right (but
no obligation) to do so and is hereby authorized to file an appropriate claim
or claims for and on behalf of Creditor.

 

e)             Creditor represents
and warrants that does not have a lien or security
interest in, and has not accepted an assignment of, any Collateral, and it will
not take a lien or security interest in, or accept an assignment of, any
Collateral so long as this Agreement remains in effect.   “Collateral” has the meaning set out in that certain Warehousing Credit and Security Agreement (Manufactured
Housing) (the “Credit Agreement”) between Borrower and Lender, as amended from
time to time, dated on or about the same date as this Agreement.

 

f)             For violation of this
Agreement, Creditor shall be liable to Lender for all loss and damage sustained
by reason of such breach, and upon any such violation, Lender may accelerate
the maturity of its claims against Borrower, at Lender’s option.  Notwithstanding the foregoing, in no event
shall Lender be entitled to incidental, consequential or punitive damages.

 

g)            Creditor will, at any
time and from time to time, promptly execute and deliver all further
instruments and documents, and take all further action, that may be reasonably
necessary in order to protect any right or interest granted hereby or to enable
Lender to exercise and enforce its rights and remedies hereunder.

 

h)            Each party agrees to
provide to the other parties, upon the occurrence thereof, notice of the
existence of any event of default (however defined or described) under any
document or agreement relating to its claims against Borrower, or any
condition, act or event, which with the giving of notice or the passage of time
or both would constitute an event of default (however defined or described)
thereunder.

 

i)              All rights and
interest of Lender hereunder, and all agreements and obligations of Creditor
hereunder, shall remain in full force and effect irrespective of:

 

j)              any sale,
assignment, pledge, encumbrance or other disposition of the claims of Lender
against Borrower (“Lender Claims”) and/or any document or instrument executed
in connection therewith;

 

k)             any change in the
Lender Claims, or any refinancing thereof, or any other amendment,
modification, extension or renewal of or waiver of or any consent to departure
from any document or instrument relating thereto, including, without
limitation, changes in the terms of the repayment of loan proceeds,
modifications, extensions or renewals of payment dates, changes in interest
rate or the advancement of additional funds by Lender in its discretion; or

 

l)              any
exchange, release or nonperfection of any collateral, or any release or
amendment or waiver of or consent to departure from any guaranty, for all or
any of the Lender Claims.

 

m)            This Agreement shall
continue to be effective or be reinstated, as the case may be, if at any time
any payment or performance of all or any portion of the Lender Claims is
rescinded or must otherwise be returned by Lender or any other party to the
documents relating thereto upon the insolvency, bankruptcy or reorganization of
any such party or otherwise, all as though such payment had not been made.

 

n)            Creditor hereby waives
promptness, diligence, notice of acceptance and any other notice with respect
to this Agreement and any requirement that Lender protect,
secure, perfect or insure any security interest or lien or any property subject
thereto or exhaust any right or take any action against Creditor or any other
person or entity or any collateral.

 

o)            No failure on the part
of Lender to exercise, and no delay in exercising, any right hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right hereunder preclude any

 

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other
or further exercise thereof or the exercise of any other right.  The remedies herein provided are cumulative
and not exclusive of any remedies provided by law.

 

p)            No amendment or waiver
of any provision of this Agreement nor consent to any departure by Creditor
therefrom shall in any event be effective unless the same shall be in writing
and signed by Lender, and then such waiver or consent shall be effective only
in the specific instance and for the specific purpose for which given.

 

q)            Creditor agrees to pay
upon demand, to Lender the amount of any and all expenses, including the
reasonable fees and expenses of its counsel and all court costs and other
reasonable litigation expenses, including but not limited to expert witness
fees, document copying expenses, exhibit preparation costs, and courier, postage
and communication expenses, which Lender may incur in connection with the
exercise or enforcement of any of its rights or interest hereunder.

 

r)             All notices, request
and demands that may be required or otherwise provided for or contemplated
under the terms of this Agreement shall, whether or not so stated, be in
writing, and shall be given by any of the following means: (a) personal
delivery; (b) reputable overnight courier service; or (c) registered or
certified first class mail, return receipt requested.  Any notice, request or demand sent pursuant
to clause (a) above shall be deemed received upon personal delivery, and if
sent pursuant to clause (b) shall be deemed received on the next business day
following delivery to the courier service, and if sent pursuant to clause (c)
shall be deemed received five (5) days following deposit in the mail.

 

The addresses for notices
are as follows:

 

	
  If to Creditor,

  addressed to:

  	
   

  	
  Fleetwood Enterprises,
  Inc.

  3125 Myers Street

  Riverside, CA 92503

  Attention:  Boyd Plowman, Senior Vice
  President

  
	
   

  	
   

  	
   

  
	
  If to Lender,

  addressed to:

  	
   

  	
  Residential Funding
  Corporation

  7501 Wisconsin Avenue

  Bethesda, MD 20814

  Attention: Jim Clapp, Director

  

 

Such addresses may be
changed by written notice to the other parties given in the manner provided
above.

 

3)             This Agreement shall
be governed in all respects by the laws of the State of Minnesota and shall be
binding upon and shall inure to the benefit of Creditor, Lender and Borrower,
and their respective heirs, executors, administrators, personal
representatives, successors and assigns. 
This Agreement and any claim or claims of Lender pursuant hereto may be
assigned by Lender, in whole or in part, at any time, in accordance with the
terms of the Credit Agreement.

 

	
   

  	
  FLEETWOOD ENTERPRISES,
  INC.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/

  
	
   

  	
   

  	
   

  
	
   

  	
  Its:

  	
   

  

 

3

 

	
  STATE OF

  	
   

  	
  )

  
	
   

  	
   

  	
  )  ss.

  
	
  COUNTY OF

  	
   

  	
  )

  

 

On
September       , 2004, before me, a Notary
Public, personally appeared
                                                                      
the
                                                                      
of
                                                            ,
personally known to me (or proved to me on the basis of satisfactory evidence)
to be the person whose name is subscribed to the within instrument and
acknowledged to me that he/she executed the same in his/her authorized
capacity, and that by his/her signature on the instrument the person, or the
entity upon behalf of which the person acted, executed the instrument.

 

	
  WITNESS my hand and
  official seal.

  	
   

  	
   

  
	
   

  	
  /s/

  	
   

  
	
   

  	
   

  
	
   

  	
  Notary Public

  
	
   

  	
  (SEAL) My Commission
  Expires:

  	
   

  	
   

  
					

 

ACCEPTANCE
OF INTERCREDITOR AGREEMENT

BY
BORROWER

 

Borrower named in the
Intercreditor Agreement set forth hereinbefore, hereby (a) represents and
warrants to Lender that it is presently indebted to Creditor executing said
Intercreditor Agreement in the approximate principal amount of
$                          ;
and (b) accepts and consents to the Intercreditor Agreement, and agrees to be
bound by all of the provisions thereof and to recognize all priorities and
other rights granted thereby to RESIDENTIAL FUNDING CORPORATION, a Delaware
corporation, its successors and assigns, and to perform in accordance
therewith.

 

 

	
   

  	
  HOMEONE CREDIT CORP.,

  a Delaware corporation

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Its:

  	
   

  	
   

  

 

4Exhibit
10.13

 

LINE OF CREDIT AGREEMENT

 

TERM LOAN AND CREDIT AGREEMENT

 

THIS TERM LOAN AND CREDIT AGREEMENT is made as of the 6 day of August,
2001, and is by and between WATERS INSTRUMENTS, INC., a Minnesota corporation
with offices located in Plymouth, Minnesota (the “Borrower”), and WELLS FARGO
BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking association with
offices located in Rochester, Minnesota (the “Bank”).

 

RECITALS:

 

WHEREAS, the Bank is the holder of that certain Revolving Note dated
December 26, 2000 (the “Old Revolving Note”) made by the Borrower in the
face amount of $2,000,000.00 payable to the Bank; and,

 

WHEREAS, the Old Revolving Note evidences indebtedness under a
revolving line of credit established by the Bank for the benefit of the
Borrower in the amount of $2,000,000.00; and

 

WHEREAS, the Borrower has requested the Bank (i) to renew the revolving
line of credit to November 30, 2002, (ii) to increase the amount of the
revolving line of credit from $2,000,000.00 to $3;000,000.00, and (iii) to make
a non-revolving term loan to the Borrower in the amount of $5,200,000.00; and

 

WHEREAS, the Bank is willing to grant the Borrower’s requests, subject
to the provisions of this Term Loan And Credit Agreement;

 

NOW, THEREFORE, in consideration of the premises and of the mutual
agreements herein, the parties agree as follows:

 

SECTION 1                                   Definitions

 

In addition to those terms defined in the above Recitals, as used
herein:

 

1.1                                 “Acceptable
Accounts Receivable” shall mean Borrower’s accounts receivable which are:  (i) less than 60 days past the invoice due
date; (ii) not subject to offset or dispute, or comprising contra accounts;
(iii) not due from the U.S. Government, foreign account debtors, or employees,
subsidiaries or affiliates of the Borrower; (iv) not due from an account
debtor, 10% or more of whose accounts owed to Borrower are older than 60 days
past the invoice due date; and (v) not representing booked but unfilled orders.

 

1.2                                 “Acceptable
Inventory” shall mean Borrower’s raw materials and finished goods inventory
located in the State of Minnesota, but shall specifically exclude
work-in-process, inventory owned by the Borrower for more than one year,
inventory placed with other vendors, LIFO reserve, and other standard (in the
reasonable determination of the Bank) ineligibles.

 

1.3                                 “Acquisition”
shall mean the Borrower’s acquisition of all presently outstanding shares of
stock in North Central.

 

1.4                                 “Agreement”
shall mean this Term Loan And Credit Agreement, and all amendments and supplements
hereto which may from time to time become effective hereafter.

 

1.5                                 “Applications”
shall mean each Application And Agreement For Irrevocable Standby Letter Of
Credit and each Application For Documentary Letters of Credit executed by the
Borrower, whether before or after the Closing Date, in connection with a Letter
of Credit.

 

1.6                                 “Borrowed
Money” shall mean funds obtained by incurring contractual indebtedness, but
shall not include

 

1

 

trade accounts payable or money borrowed from the Bank.

 

1.7                                 “Borrowing
Base” shall mean the sum of 75% of Acceptable Accounts Receivable, plus 50% of
Acceptable Inventory, plus 85% of the Borrower’s appraised equipment.

 

1.8                                 “Borrowing
Base Certificate” shall mean a schedule of the Borrower’s assets
comprising the Borrowing Base, which certificate is prepared and furnished to
Bank pursuant to Section 7.3(D) hereof, and which is executed by an
authorized officer of Borrower and is in form and content acceptable to the Bank.

 

1.9                                 “Closing
Date” shall mean the date on which this Agreement is executed by the Borrower
and delivered to the Bank.

 

1.10                           “Consolidated
Term Note” shall mean a promissory note executed by the Borrower in the face
amount of $5,200,000.00, evidencing the Term Loan, and becoming effective
pursuant to the provisions of Section 3.3 hereof.

 

1.11                           “Consolidation
Date” shall mean October 5, 2001, unless said date is extended by the Bank
in its sole discretion.

 

1.12                           “Credit”
shall mean a revolving line of credit established by the Bank for the benefit
of the Borrower in the amount of $3,000,000.00.

 

1.13                           “Current
Note” shall mean the promissory note made by the Borrower in the face amount of
$3,000,000.00, evidencing indebtedness under the Credit.

 

1.14                           “Current
Ratio” shall mean the ratio of current assets to current liabilities, each as
determined in accordance with Generally Accepted Accounting Principles.

 

1.15                           “Debt
Service Coverage Ratio” shall mean the ratio of Traditional Cash Flow to
current maturities of long-term debt.

 

1.16                           “EBITDA”
shall mean earnings before interest expense, taxes, depreciation and
amortization.

 

1.17                           “ENF”
shall mean Engineered Narrow Fabrics, Incorporated, a Massachusetts
corporation.

 

1.18                           “Events
of Default” shall mean any and all events of default described in
Section 9 hereof.

 

1.19                           “Excess
Cash Flow” shall mean the difference of (i) Traditional Cash Flow for the
relevant fiscal year minus (ii) the sum of principal payments made in respect
of the Term Notes during such fiscal year (including without limitation those
principal payments made pursuant to Section 3.5 hereof during such fiscal
year), plus permitted dividends paid during such fiscal year plus permitted
capital expenditures during such fiscal year.

 

1.20                           “First
Term Note” shall mean a promissory note executed by the Borrower in the face
amount of $1,000,000.00, evidencing a portion of the Term Loan.

 

1.21                           “Funded
Debt” shall mean all interest bearing indebtedness owed by the Borrower.

 

1.22                           “L/C
Exposure,” as of the date of determination, shall mean the sum of (i) the
aggregate dollar amount available to beneficiaries under all outstanding
standby Letters of Credit, and (ii) the aggregate amount paid by the Bank
on drafts drawn under standby Letters of Credit for which payment the Borrower
has not reimbursed the Bank, plus accrued but unpaid interest thereon.

 

1.23                           “Letters
of Credit” shall mean each and every standby letter of credit, and each and
every documentary letter of credit, issued by the Bank for the account of the
Borrower, whether before or after the Closing Date.

 

1.24                           “Leverage
Ratio” shall mean the ratio of the Borrower’s Total Debt to Tangible Net Worth.

 

2

 

1.25                           “Mortgage”
shall mean a real estate mortgage and an assignment of rents and leases, duly
executed by the Borrower and delivered to the Bank pursuant to
Section 5.1(I) hereof.

 

1.26                           “Mortgaged
Premises” shall mean the real estate and improvements described on attached
Exhibit A.

 

1.27                           “Net
Worth” shall mean the difference of total assets minus total liabilities, each
as determined in accordance with Generally Accepted Accounting Principles.

 

1.28                           “North
Central” shall mean North Central Plastics, Incorporated, a Minnesota
corporation, with offices located in Ellendale, Minnesota.

 

1.29                           “Notes”
shall mean the Current Note and the Term Notes.

 

1.30                           “Old
Credit Agreement” shall mean that certain Credit Agreement dated
December 30, 1999 (as amended) made between the Borrower and the Bank.

 

1.31                           “Permitted
Liens” shall mean:

 

A.                                   Liens in favor of
the Bank;

 

B.                                     Existing liens
disclosed to the Bank in writing prior to the date of this Agreement; and

 

C.                                     Liens for taxes
not delinquent or which a Borrower is contesting in good faith.

 

1.32                           “SEC”
shall mean the Securities And Exchange Commission of the United States.

 

1.33                           “Second
Term Note” shall mean a promissory note executed by the Borrower in the face
amount of $4,200,000.00, evidencing a portion of the Term Loan.

 

1.34                           “Security
Agreement” shall mean a security agreement duly executed by the Borrower and
delivered to the Bank pursuant to Section 5.1(J) hereof.

 

1.35                           “Tangible
Net Worth” shall mean Net Worth of Borrower minus the aggregate amount of the
items properly shown as the following types of assets on its balance sheet,
determined in accordance with Generally Accepted Accounting Principles
consistently applied: 
(i) goodwill, patents, copyrights, mailing lists, trade names,
trademarks, servicing rights, organizational and franchise costs, bond
underwriting costs, and other like assets properly classified as intangible;
(ii) leasehold improvements; (iii) receivables and other amounts due from
any shareholder, director, officer, or employee, and receivables and other
amounts due from any other related or affiliated person, corporation,
partnership, trust, or other entity; and (iv) investments or interests in
non-public companies, cooperatives, or partnerships.

 

1.36                           “Term
Loan” shall have the meaning ascribed to it in Section 3.1 hereof.

 

1.37                           “Term
Notes” shall mean either (i) the First Term Note and the Second Term Note, or
(ii) the Consolidated Term Note, as the case may be.

 

1.38                           “Termination
Date” shall mean November 30, 2002.

 

1.39                           “Total
Debt” shall mean the sum of (i) all items of indebtedness or liability which,
in accordance with Generally Accepted Accounting Principals, would be included
in determining liabilities as shown on the liability side of a balance sheet of
the related entity plus (ii) any indebtedness secured by any mortgage, pledge,
lien or security interest existing on property owned by such entity, and (iii)
guaranties, contingent obligations, and endorsements (other than for purposes
of collection in the ordinary course of business) made by the related entity.

 

1.40                           “Traditional
Cash Flow” shall mean net income after taxes, plus depreciation, amortization
and other

 

3

 

non-cash charges.

 

1.41                           “USB”
shall mean U.S. Bank National Association fka First Bank National Association,
a national banking association.

 

1.42                           “Wall
Street Prime Rate” shall mean the rate of interest indicated as the “prime
rate” in the Money Rates section of the Wall Street Journal, as in effect
from time to time.

 

SECTION 2                                   The
Credit

 

2.1                                 Subject
to the other provisions of this Agreement, the Bank may make advances under the
Credit to the Borrower from time to time from the effective date hereof until
the Termination Date in an aggregate principal amount not exceeding the lesser
of (i) the difference of the Borrowing Base minus the sum of the L/C Exposure
plus the outstanding principal balance of the Term Notes; or (ii) THREE MILLION
AND NO/100 DOLLARS ($3,000,000.00), at any one time outstanding.  Each advance under this Section 2.1 will be requested in writing or in person
by an authorized officer of the Borrower, or telephonically by any person
reasonably believed by the Bank to be an authorized officer of the
Borrower.  Requests for advances must be
received by the Bank no later than 1:00 p.m. on the day of such advance.  Each request shall be deemed a
representation and warranty by the Borrower that the representations and
warranties set forth in Section 6 hereof are true as of the date of such
request.  Each advance under this
Section 2.1 will be evidenced by a notation on the Bank’s records which,
absent manifest error; shall be conclusive evidence of such advance, and by the
Current Note.  The Current Note shall
replace, but not be deemed payment or satisfaction of, the Old Revolving
Note.  Within the limits of the Credit
and subject to the terms and conditions hereof, the Borrower may borrow, prepay
pursuant to Section 2.5 hereof and reborrow pursuant to this
Section 2.1.

 

2.2                                 Interest
on the unpaid principal of the Current Note shall be calculated at an annual
rate which, at all times, shall be one-half of one percent (0.50%) less than
the Wall Street Prime Rate in effect from time to time.  Interest shall be calculated on the basis of
the actual number of days elapsed in a year of 360 days.

 

2.3                                 Interest
on the Current Note shall be payable monthly, commencing August 31, 2001,
and continuing on the last day of each succeeding month, and on the Termination
Date.

 

2.4                                 The
principal of the Current Note shall be repayable on the Termination Date.  Additionally, the Borrower shall cause the
outstanding principal balance of the Current Note to be $0.00 for any period of
sixty (60) consecutive calendar days during each fiscal year, commencing with
the fiscal year ending June 30, 2002.

 

2.5                                 The
Borrower may at any time prepay the Current Note in whole or from time to time
in part without premium or penalty.

 

2.6                                 If,
at any time and from time to time, the sum of the aggregate outstanding
principal balance of the Current Note and the Term Notes, plus the L/C
Exposure, exceeds the Borrowing Base, the Borrower shall immediately make a
prepayment of principal of the Current Note in an amount sufficient to
eliminate such excess.

 

2.7                                 Subject
to the other provisions of this Agreement, upon submission by the Borrower of
an Application in form and content acceptable to the Bank, the Bank may issue
Letters of Credit from time to time until the Termination Date.  Each Letter of Credit shall be subject to
the provisions of the related Application. 
Each standby Letter of Credit shall be deemed to have been issued under
the Credit.  The face amount of each
standby Letter of Credit shall reduce, on a dollar-for-dollar basis, the amount
available to the Borrower for direct borrowings under Section 2.1
hereof.  In no event shall the Bank
issue a standby Letter of Credit if, after giving effect to such issuance, (i)
the sum of the L/C Exposure plus the outstanding principal balances of the
Current Note and the Term Notes would exceed the Borrowing Base, or (ii) the
L/C Exposure would exceed $300,040.00. 
The expiry date of each Letter of Credit must be no later than six
months after the Termination Date.

 

2.8                                 It
is contemplated that upon payment by the Bank of drafts drawn under Letters of
Credit, the Bank will debit the Borrower’s general operating account maintained
at the Bank in an amount sufficient to reimburse the

 

4

 

Bank for such payment.  If
insufficient funds are in said operating account, the Bank will cause an
advance to be made under Section 2.1 hereof in an amount sufficient to
reimburse the Bank for such payment. 
The provisions of this Section 2.8 shall not be deemed a waiver of
any of the Bank’s rights under any of the Applications, or under
Section 2.6 of this Agreement.

 

2.9                                 The
Borrower shall pay the Bank an issuance fee for each Letter of Credit at an
annual rate to be negotiated at the time the related Letter of Credit is
requested.  The Borrower shall also be
liable for payment of all other fees customarily charged by the Bank in
connection with standby and documentary letters of credit.

 

SECTION 3                                   The
Term Loan

 

3.1                                 Subject
to the other provisions of this Agreement, the Bank shall make a term loan
(“Term Loan”) to the Borrower in the amount of $5,200,000.00 available in one
draw on or before August 15, 2001. 
The Term Loan shall be non-revolving. 
A portion of the Term Loan in the amount of $1,000,000.00 shall be
evidenced by the First Term Note, and the remaining portion of the Term Loan in
the amount of $4,200,000.00 shall be evidenced by the Second Term Note.  On the Consolidation Date, the First Term
Note and the Second Term Note shall be replaced by the Consolidated Term Note,
subject to the provisions of Section 3.3 hereof.

 

3.2                                 Interest
on the unpaid principal of the Term Notes shall accrue at a fixed annual rate
equal to seven and one-half percent (7.50%). 
Interest on the Term Notes shall be calculated on the basis of the
actual number of days elapsed in a year of 360 days.

 

3.3                                 The
Borrower shall pay accrued interest in respect of the First Term Note and the
Second Term Note on August 31, 2001 and September 30, 2001.  The principal of the First Term Note and the
Second Term Note shall be repayable on the Consolidation Date; PROVIDED,
HOWEVER, that if, as of the Consolidation Date, there exists no Event of
Default or event which, with the giving of notice or the passage of tune (or
both), could become an Event of Default, the First Term Note and the Second
Term Note shall be replaced by the Consolidated Term Note, in which case
principal of and interest on the Term Loan shall be paid together as follows:

 

Eighty-three (83) installments, each in the
amount of $79,760.00, commencing October 31, 2001, and continuing on the
last day of each consecutive month hereafter through and including
August 31, 2008; plus, one (1) final payment in an amount equal to all
then-remaining outstanding principal of the Term Note, plus accrued but unpaid
interest, shall be due and payable on September 30, 2008.

 

3.4                                 All
payments received in respect of the Term Notes shall first be applied to
accrued but unpaid interest, with the remainder applied to reduction of
principal.

 

3.5                                 In
addition to the payments required under Section 3.3 hereof, within 150
days after the end of each fiscal year of the Borrower, commencing with the
fiscal year ending June 30, 2002, the Borrower shall make a prepayment to
the Bank in respect of the Consolidated Term Note; which prepayment shall be in
an amount equal to fifty percent
(50%) of the Excess Cash Flow for said fiscal year.  The payments described in this Section 3.5 shall be applied
to the principal portion of scheduled installments in inverse order of their
maturities, and shall not be subject to a prepayment premium.

 

3.6                                 The
Borrower may at any time prepay the Term Notes in whole or from time to time in
part without premium, unless such prepayment is financed by another lender
other than the Bank, in which case (i) each prepayment made on or before
July 31, 2003 shall be accompanied by a premium in an amount equal to
three percent (3.0%) of the principal being prepaid, (ii) each prepayment made
after July 31, 2003 and on or before July 31, 2005 shall be
accompanied by a premium in an amount equal to two percent (2.0%) of the
principal being prepaid, and (iii) prepayments made after July 31,
2005 shall be accompanied by a premium in an amount equal to one percent (1.0%)
of the principal being prepaid.  All
prepayments shall be applied to the principal portion of scheduled installments
in inverse order of their maturities.

 

3.7                                 If,
at any time and from time to time the sum of the aggregate outstanding
principal balance of the Current

 

5

 

Note and the Term Notes, plus the L/C Exposure, exceeds the Borrowing
Base, the Borrower shall immediately make a prepayment of principal of the Term
Notes in an amount sufficient to eliminate such excess.

 

SECTION 4                                   Security

 

4.1                                 The
payment and performance of the Borrower’s obligations under this Agreement, the
Notes and the Applications shall be secured by the Security Agreement.  Pursuant to the provisions of the Security
Agreement, the Borrower shall grant the Bank a first security interest in all accounts receivable, inventory,
equipment and general intangibles, whether now owned or hereafter acquired by
the Borrower.

 

4.2                                 Prior
to the Consolidation Date, the payment and performance of the Borrower’s
obligations under the First Term Note shall be secured by the Mortgage.  On the Consolidation Date, and at all times
thereafter, the payment and performance of the Borrower’s obligations under the
Current Note and the Consolidated Term Note shall be secured by the
Mortgage.  The Mortgage shall secure
principal indebtedness in the aggregate amount of $5,200,000.00, plus accrued
interest thereon.  Pursuant to the
provisions of the Mortgage, the Borrower shall grant the Bank a first mortgage
lien on the Mortgaged Premises, and shall assign to the Bank all of the
Borrower’s right, title and interest in and to all present and future leases
executed by the Borrower (as Landlord) relative to the Mortgaged Premises.

 

4.3                                 At
any time requested by the Bank, the Borrower shall execute and deliver, or
cause to be executed and delivered, to the Bank such additional documents as
the Bank may consider to be necessary or desirable to evidence or perfect the
mortgage lien referred to in the Mortgage and the security interests referred
to in the Security Agreement.

 

SECTION 5                                   Conditions
Precedent

 

5.1                                 On
or before the Closing Date, the Borrower shall deliver the following to the
Bank, in form and content
acceptable to the Bank:

 

A.                                   A copy of the
Articles of Incorporation of the Borrower, and all amendments thereto,
certified as of the most recent date practicable by the Secretary of State of
Minnesota;

 

B.                                     A copy of the
By-laws of the Borrower, and all amendments thereto, certified as true and
complete by an appropriate officer of the Borrower;

 

C.                                     A certificate, as
of the most recent date practicable, of the Secretary of State of Minnesota as
to the good standing of the Borrower;

 

D.                                    A certificate of
authority, duly executed by the corporate Secretary or other appropriate
officer of the Borrower;

 

E.                                      The Current Note,
duly executed by the Borrower;

 

F.                                      The First Term
Note, duly executed by the Borrower;

 

G.                                     The Second Term
Note, duly executed by the Borrower;

 

H.                                    The Consolidated
Term Note, duly executed by the Borrower;

 

I.                                         The Mortgage,
duly executed by the Borrower;

 

J.                                        The Security
Agreement, duly executed by the Borrower;

 

K.                                    UCC-1 financing
statements, duly executed by the Borrower;

 

6

 

L.                                      A Hazardous
Substances Certificate And Indemnity Agreement, relevant to the Mortgaged
Premises, duly executed by the Borrower;

 

M.                                 An ALTA lenders title
insurance policy from a title company acceptable to the Bank, insuring the
Bank’s interest in the Mortgaged Premises;

 

N.                                    A written Phase I
environmental assessment of the Mortgaged Premises, performed by an entity
acceptable to the Bank;

 

O.                                    An agreement to
provide flood insurance for the Mortgaged Premises, duly executed by the
Borrower;

 

P.                                      A copy of the
fully executed purchase agreement relating to the Acquisition;

 

Q.                                    UCC lien searches
relative to the assets of North Central and ENF;

 

R.                                     A written opinion
of legal counsel for the Borrower, opining that (i) the Borrower is duly
organized and in good standing under the laws of the State of Minnesota, (ii)
the Borrower is registered as a foreign corporation in each state where such
registration is recommended by its legal counsel, (iii) the Borrower has the
corporate power to execute and deliver this Agreement and the Notes, and to
perform in accordance with the terms and conditions set forth herein and
therein, (iv) all corporate action necessary for the Borrower’s execution,
delivery and performance under this Agreement has been undertaken and obtained,
(v) upon execution, this Agreement and the Notes shall constitute valid and
binding obligations of the Borrower, and (vi) to the best of counsel’s
knowledge, this Agreement and the transactions contemplated thereby do not
conflict with the Borrower’s Articles of Incorporation or By-laws, or of any
law, regulation or other agreement binding upon the Borrower; and

 

S.                                      A facility fee in
the amount of $21,000.00.

 

5.2                                 As
soon after the Closing Date as practicable, but in any case no later than three
(3) business days after the Closing Date, the Borrower shall deliver the
following to the Bank, in form and content acceptable to the Bank:

 

A.                                   Copies of the Plan
of Merger and Articles of Merger, relating to the merger of North Central into
the Borrower, which copies are certified as of the most recent date practicable
by the Secretary of State of Minnesota; and

 

B.                                     Copies of UCC
termination statements duly executed by USB, Alliant Gas & Electric and
Edward T. Murphy, pursuant to which those entities terminate all of their lien
filings against North Central and (where applicable) ENF.

 

5.3                                 The
Bank shall not consider any request for an advance under the Credit, the
funding of the Term Loan, or the issuance of a Letter of Credit, unless:

 

A.                                   The representations
and warranties contained in Section 6 hereof are true and accurate on and
as of the date of such request; and

 

B.                                     No Event of
Default, and no event which might become an Event of Default after the lapse of
time or the giving of notice and the lapse of time, has occurred and is
continuing or will exist upon the date of such advance, funding or issuance.

 

7

 

SECTION 6                                   Representations
and Warranties

 

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

 

6.1                                 The
Borrower is a corporation duly organized, validly existing and in good standing
under the laws of the State of Minnesota.

 

6.2                                 The
execution, delivery and performance of this Agreement and the other documents
referred to herein by the Borrower are within its corporate powers, have been
duly authorized, and are not in contravention of law or the terms of the
Articles of Incorporation or By-laws of the Borrower, or of any material
undertaking to which the Borrower is a party or by which the Borrower is bound.

 

6.3                                 The
property of the Borrower is not subject to any lien except Permitted Liens.

 

6.4                                 No
litigation or governmental proceeding is pending or, to the knowledge of the
officers of the Borrower, threatened against the Borrower which could have a
material adverse effect on the Borrower’s financial condition or business.

 

6.5                                 All
financial statements delivered to Bank by or on behalf of the Borrower,
including any schedules and notes pertaining thereto, have been prepared in
accordance with Generally Accepted Accounting Principles consistently applied,
and fully and fairly present in all material respects the financial condition
of the Borrower at the dates thereof and the results of operations for the
periods covered thereby, and there have been no material adverse changes in the
financial condition or business of the Borrower from March 31, 2001 to the
date hereof.

 

6.6                                 As
of the date of this Agreement, there exists no indebtedness under the Old
Revolving Note, the L/C Exposure equals
$            , and
the aggregate amount available to the beneficiaries of all outstanding
documentary Letters of Credit is
$            .  Such indebtedness constitutes legal, valid
and binding obligations owed by the Borrower to the Bank, subject to no
defense, counterclaim, offset, abatement or recoupment.

 

6.7                                 As
of the date of this Agreement, there exists no event of default under the Old
Credit Agreement.

 

6.8                                 The
Purchase Agreement relative to the Acquisition is in full force and effect, has
been duly executed and delivered, is valid and enforceable in accordance with
its terms, is free from default by Borrower and to Borrower’s knowledge by any
other party thereto, has not been amended in any respects from the form of the
contract delivered to the Bank, and has not been assigned to any entity by
Borrower or to Borrower’s knowledge by any other party thereto.

 

SECTION 7                                   Affirmative
Covenants

 

The Borrower covenants and agrees that, for so long as the Credit
remains in existence, or any actual or contingent indebtedness remains
outstanding under any one or more of the Notes or Applications, unless the Bank
shall otherwise consent in writing, it will:

 

7.1                                 Pay,
when due, all taxes assessed against it or its property, except to the extent
and for so long as contested in good faith.

 

7.2                                 Maintain
its corporate existence, and comply with all respective laws and regulations
applicable thereto.

 

7.3                                 Furnish
to the Bank, in form and content acceptable to the Bank:

 

A.                                   Within 90 days after
the end of each fiscal year of the Borrower, (i) a detailed report of audit of
the Borrower and its subsidiaries for such fiscal year, prepared on a
consolidated and consolidating basis, including the balance sheets of the
Borrower and its subsidiaries as of the end of such fiscal year, and the
statements of profit and loss and surplus of the Borrower and its subsidiaries
for the fiscal year then

 

8

 

ended, prepared by independent certified public accountants acceptable
to the Bank, (ii) a photocopy of the complete Form 10K filed by the Borrower
with the SEC for such fiscal year, and (iii) financial projections
prepared on a month-by-month basis for the immediately succeeding fiscal year,
duly executed by the Chief Financial Officer of the Borrower.

 

B.                                     Within 45 days
after the end of each fiscal quarter of the Borrower, a photocopy of the
complete Form 10Q filed by the Borrower with the SEC for such quarter.

 

C.                                     Within 45 days
after the end of each fiscal year of the Borrower, a certificate of compliance
duly executed by an appropriate officer of the Borrower, indicating the
Borrower’s compliance (or non-compliance) with the covenants contained in
Sections 7 and 8 of this Agreement.

 

D.                                    Within 30 days
after the end of each month, (i) the balance sheets of the Borrower, and its
subsidiaries as of the end of such month, (ii) the statements of profit and
loss and surplus of the Borrower and its subsidiaries from the beginning of
such fiscal year to the end of such month, (iii) a Borrowing Base Certificate
as of the end of such month, (iv) an aging of the Borrower’s receivables and
payables as of the end of such month, and (v) a listing of the Borrower’s
inventory as of the end of such month. 
All of the foregoing shall be unaudited, but certified as correct
(subject to year-end adjustments) by an appropriate officer of the Borrower.  The reports required by clauses (i) and (ii)
of the first sentence of this paragraph shall be prepared on a consolidated and
consolidating basis.

 

E.                                      On or before
September 1, 2001, an appraisal of the Mortgaged Premises issued by a real
estate appraiser acceptable to the Bank, and indicating an appraised value
equal to or greater than $2,000,000.00.

 

F.                                      Promptly upon
knowledge thereof, notice to the Bank in writing of the occurrence of any event
which has or might, after the lapse of time or the giving of notice and the
lapse of time, become an Event of Default.

 

F.                                      Promptly, such
other relevant information as the Bank may reasonably request.

 

7.4                                 Maintain
its inventory, equipment, real estate and other properties in good condition
and repair (normal wear and tear excepted), and will pay and discharge or cause
to be paid and discharged when due, the cost of repairs to or maintenance of
the same, and will pay or cause to be paid all rental or mortgage payments due
on such real estate.

 

7.5                                 Cause
its properties of an insurable nature to be adequately insured by reputable and
solvent insurance companies against loss or damages customarily insured against
by persons operating similar properties and similarly situated, and carry such
other insurance (including business interruption insurance) as usually carried by
persons engaged in the same or similar businesses and similarly situated.

 

7.6                                 Keep
true, complete and accurate books, records and accounts in accordance with
Generally Accepted Accounting Principles consistently applied.

 

7.7                                 Permit
any of Bank’s duly authorized employees or agents the right, at any reasonable
time and from time to time, to visit and inspect the properties of the Borrower
and to examine and take abstracts from its books and records, with the expenses
of all the foregoing to be borne by the Borrower.

 

7.8                                 Without
limiting the generality of the provisions set forth in Section 7.7 hereof,
permit the Bank to conduct collateral audits on the Borrower’s premises once
during each fiscal year of the Borrower, with the expenses of the foregoing to
be borne by the Borrower.

 

7.9                                 Continue
to conduct the same general type of business as is now being carried on in
compliance with all applicable statutes, laws, rules and regulations.

 

9

 

SECTION 8                                   Negative
Covenants

 

Without the Bank’s written consent, for so long as the Credit remains
in existence or any actual or contingent indebtedness remains outstanding under
any of the Notes or Applications, the Borrower will not:

 

8.1                                 Permit
any lien, including without limitation any pledge, assignment, mortgage, title
retaining contract or other type of security interest, to exist on any of its
real or personal property, except Permitted Liens.

 

8.2                                 Subject
to the provisions of Section 10.9 hereof, permit its consolidated Tangible
Net Worth to be less than (i) $4,150;000.00 as of September 30, 2001, (ii)
$3,850,000.00 as of December 31, 2001, (iii) $3,900,000.00 as of
March 31, 2002, and (iv) $4,350,000.00 as of the end of any fiscal year,
commencing June 30, 2002.

 

8.3                                 Subject
to the provisions of Section 10.9 hereof, permits its consolidated Current
Ratio to be less than (i) 2.0 to 1.0 as of September 30, 2001, (ii) 2.0 to
1.0 as of December 31, 2001, (iii) 2.0 to 1.0 as of March 31,
2002, and (iv) 2.0 to 1.0 as of the end of any fiscal year, commencing
June 30, 2002.

 

8.4                                 Subject
to the provisions of Section 10.9 hereof, permit its consolidated Debt
Service Coverage Ratio to be less than 1.30 to 1.0 for any fiscal year,
commencing with the fiscal year ending June 30, 2002.

 

8.5                                 Subject
to the provisions of Section 10.9 hereof, permit its consolidated Leverage
Ratio to be greater than (i) 2.0 to 1.0 as of September 30, 2001, (ii) 2.0
to 1.0 as of December 31, 2001, (iii) 2.0 to 1.0 as of March 31,
2002, and (iv) 1.80 to 1.0 as of the end of any fiscal year, commencing
June 30, 2002.

 

8.6                                 Subject
to the provisions of Section 10.9 hereof, permit its consolidated ratio of
Funded Debt to EBITDA to be greater than 3.15 to 1.0 for any fiscal year,
commencing with the fiscal year ending June 30, 2002.

 

8.7                                 Permit
the aggregate amount of dividends paid to its shareholders to exceed
$100,000.00 during any fiscal year, commencing with the fiscal year ending
June 30, 2002; provided, however, that for so long as there exists any Event
of Default, the Borrower shall not pay dividends to its shareholders.

 

8.8                                 Subject
to the provisions of Section 10.9 hereof, permit its consolidated
expenditures for fixed assets and capitalized leases to exceed $525,000.00
during any fiscal year, commencing with the fiscal year ending June 30,
2002.

 

8.9                                 Subject
to the provisions of Section 10.9 hereof, permit the consolidated
aggregate amount of Borrowed Money to exceed $100,000.00 as of the end of
June 30, 2002.

 

8.10                           Become
or remain a guarantor or surety, or pledge the credit of either Borrower or
become liable in any manner (except by endorsement for deposit in the ordinary
course of business) on the other undertakings of another.

 

8.11                           Enter
into any transaction of merger or consolidation (excluding the merger of North
Central into the Borrower), or sell, assign, lease or otherwise dispose of all
or a substantial part of their properties or assets, or any of their notes or
accounts receivable, or any stock or indebtedness of any subsidiary, or any
assets or properties necessary or desirable for the proper conduct of their
businesses, or change the nature of their businesses or their accounting
procedures, or wind up, liquidate or dissolve, or agree to do any of the
foregoing, or permit ENF to do any of the foregoing (excluding a merger of ENF
into the Borrower).

 

8.12                           Purchase
or otherwise acquire or permit ENF to purchase or otherwise acquire) all or
substantially all of the assets of any entity (excluding the Acquisition).

 

8.13                           Use
the proceeds of the Term Loan for any purpose other than the Acquisition.

 

8.14                           Make
any investments in assets other than (i) securities issued by the United States
government or an agency thereof, (ii) Borrower’s existing investment in ENF,
and (iii) Borrower’s existing and future investment in Red Snap’r of
Canada, Ltd.

 

10

 

8.15                           For
so long as there exists any Event of Default, issue any treasury stock or
redeem any outstanding stock.

 

SECTION 9                                   Events
of Default

 

9.1                                 Upon
the occurrence of any of the following Events of Default:

 

A.                                   Default in any
payment of interest or of principal on any or more of the Notes when due, and
continuance thereof for 10 calendar days;

 

B.                                     Default in the
payment of any amount due under any one or more of the Applications, and
continuance thereof for 10 calendar days;

 

C.                                     Default in the
observance or performance of any covenant set forth in Sections 2.6, 3.7 or
7.3(D) hereof, and continuance thereof for 10 calendar days;

 

D.                                    Default in the observance
or performance of any covenant set forth in Section 5.2(C) or in
Section 8 hereof;

 

E.                                      Default in the
observance or performance of any other agreement of the Borrower set forth
herein (i.e., other than those addressed in Sections 9.1(A) through 9.1(D)
hereof), and continuance thereof for 30 calendar days;

 

F.                                      The occurrence of
an event of default under the Mortgage or the Security Agreement, and the
expiration of any grace period expressly provided for therein;

 

G.                                     Final judgment for
the payment of money in excess of $100,000.00 which is not covered by insurance
shall be rendered against Borrower and Borrower shall not discharge such
judgment in accordance with its terms, or procure a stay of execution thereof
within 60 calendar days from the date of entry and within such period of 60
days or longer period during which execution shall have been stayed, appeal
therefrom and cause the execution thereof to be stayed during such appeal;

 

H.                                    A garnishment, levy
or writ of attachment, or any local, state or federal notice of tax lien or
levy, is served upon the Bank for the attachment of property of the Borrower in
the Bank’s possession or of funds owed by the Bank to the Borrower, and
continuance thereof for 30 calendar days following receipt by the Borrower of a
written notice of default;

 

I.                                         Any
representation or warranty made by the Borrower herein, or in any statement or
certificate furnished by the Borrower hereunder, is untrue in any material
respect; or

 

J.                                        Jerry Grabowski
shall cease being the Chief Executive Officer of the Borrower and shall not
have been replaced within 90 calendar days thereafter by a person reasonably
acceptable to the Bank;

 

then, or at any time thereafter, unless such Event of Default is
remedied, the Bank may, by notice in writing to the Borrower, terminate the
Credit and declare all indebtedness the Notes and the Applications to be due
and payable, whereupon the Credit shall terminate and all such indebtedness
shall immediately become due and payable.

 

9.2                                 Upon
the occurrence of any of the following Events of Default:

 

The Borrower becomes insolvent or bankrupt, or makes an assignment for
the benefit of creditors, or consents to the appointment of a custodian,
trustee or receiver for itself or for the greater part of its properties; or a
custodian, trustee or receiver is appointed for the Borrower or for the greater
part of its properties without its consent, and is not discharged within 30
calendar days; or bankruptcy, reorganization or liquidation proceedings are
instituted by or against the Borrower and, if instituted against it, are
consented to by it or remain undismissed for 30 calendar days;

 

11

 

then the Credit shall automatically and immediately terminate and all
indebtedness under the Notes and the Applications shall automatically become
immediately due and payable, without notice or demand.

 

SECTION 10                             Miscellaneous

 

10.1                           The
provisions of this Agreement shall be in addition to those of any guaranty,
pledge or security agreement, note or other evidence of liability held by the
Bank, all of which shall be construed as complementary to each other.  Nothing herein contained shall prevent the
Bank from enforcing any or all of the rights and remedies available to it at
law, in equity or by agreement.

 

10.2                           From
time to time, the Borrower will execute and deliver to the Bank such additional
documents and will provide such additional information as the Bank may
reasonably require to carry out the terms of this Agreement and be informed of
the Borrowers’ status and affairs.  All
documentation executed in connection with this Agreement, whether before, on or
after the Closing date, shall be in form and content acceptable to the Bank.

 

10.3                           In
addition to the amount owed by the Borrower under Section 5.1(S) hereof,
the Borrower will pay all expenses, including the reasonable fees and expenses
of legal counsel for the Bank, incurred in connection with the preparation,
administration, modification and enforcement of this Agreement and the other
documents referred to herein.

 

10.4                           All
notices or consents required or permitted by this Agreement shall be in writing
and shall be deemed delivered if delivered in person or if sent by United
States mail, postage prepaid, or via facsimile, as follows, unless such address
is changed by written notice hereunder:

 

A.                                   If
to the Borrower:

Waters Instruments, Inc.

2950 Xenium Lane North

Suite 108

Plymouth, Minnesota 55441

Attention:  Jerry Grabowski,
President & CEO

 

B.                                     If
to the Bank:

Wells Fargo Bank Minnesota, National Association

Rochester Office

21 First Street Southwest

Rochester, Minnesota 55902

Attention:  Susan L. Reinke,
Vice President

Fax:  507-285-2849

 

10.5                           The
Bank shall have the right at all times to enforce the provisions of this
Agreement and the other documents referred to herein in strict accordance with
the terms hereof and thereof, notwithstanding any conduct or custom on the part
of the Bank in refraining from so doing at any time or times.  The failure of the Bank at any time or times
to enforce its rights under such provisions, strictly in accordance with the
same, shall not be construed as having created a custom in any way or manner
contrary to specific provisions of this Agreement or as having in any way or
manner modified or waived the same.  All
rights and remedies of the Bank are cumulative and concurrent, and the exercise
of one right or remedy shall not be deemed a waiver or release of any other
right or remedy.

 

10.6                           This
Agreement shall inure to the benefit of, and shall be binding upon, the
respective successors and permitted assigns of the parties hereto.  The Borrower has no right to assign any of
its rights or obligations hereunder without the prior written consent of the
Bank.  This Agreement, and the documents
executed and delivered pursuant hereto or in connection herewith, constitute
the entire agreement between the parties, and may be amended only by a writing
signed on behalf of each party.  This
Agreement supersedes and replaces the Old Credit Agreement.

 

10.7                           If
any provision of this Agreement shall be held invalid under any applicable law,
such invalidity shall not affect any other provision of this Agreement that can
be given effect without the invalid provision, and, to this end,

 

12

 

the provisions hereof are severable.

 

10.8                           The
substantive laws of the State of Minnesota shall govern the construction of
this Agreement and the rights and remedies of the parties hereto.

 

10.9                           For
purposes of calculating compliance with the covenants set forth in Sections 8.2
through 8.6, and Sections 8.8 and 8.9 hereof, consolidated data of the Borrower
and ENF shall be used.

 

IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.

 

	
  WATER INSTRUMENTS, INC.

  	
  WELLS FARGO BANK MINNESOTA,

  NATIONAL ASSOCIATION

  
	
   

  	
   

  
	
  By:

  	
  /s/ Gregg Anshus

  	
   

  	
  By:

  	
  /s/ Susan L. Reinke

  	
   

  
	
   

  	
  Gregg Anshus,

  	
   

  	
  Susan L. Reinke,

  
	
   

  	
  Treasurer & CFO

  	
   

  	
  Vice President

  
						

 

13

 

EXHIBIT A

 

Legal Description of Mortgaged Premises

 

Outlot “A,” Valleyhigh Second Subdivision, in the City of Rochester,
Olmsted County, Minnesota.

 

14

 

FIRST AMENDMENT TO CREDIT AGREEMENT

 

THIS FIRST AMENDMENT is made as of the 29th day of January, 2003, and
is by and between Waters Instruments, Inc., a Minnesota corporation (the
“Borrower”), and Wells Fargo Bank Minnesota, National Association, a national
banking association (the “Bank”).

 

REFERENCE IS HEREBY MADE to that certain Term Loan And Credit Agreement
dated August 6, 2001 (the “Credit Agreement”) made between the Borrower
and the Bank.  Capitalized terms not
otherwise defined herein shall have the respective meanings ascribed to them in
the Credit Agreement.

 

WHEREAS, pursuant to the provisions of Section 3.1 and 3.3 of the
Credit Agreement, the First Term Note and the Second Term Note have been
replaced by the Consolidated Term Note; and,

 

WHEREAS, the Borrower has requested the Bank (i) to renew the Credit to
November 30, 2003, and (ii) to maintain the Term Loan in accordance with
the provisions of the Credit Agreement and the Consolidated Term Note; and,

 

WHEREAS, the Bank is willing to grant the Borrower’s requests, subject
to the provisions of this First Amendment;

 

NOW, THEREFORE, in consideration of the premises and for other valuable
consideration received, it is agreed as follows:

 

1.                                       Section 1
of the Credit Agreement is hereby amended by changing Sections 1.15 and 1.38 so
that, when read in their entireties, they provide as follows:

 

1.15                           “Debt Service Coverage
Ratio” shall mean the ratio of Traditional Cash Flow for the period of
determination to current maturities of long-term debt for said period of
determination, but excluding those principal payments made pursuant to
Section 3.5 hereof during such period of determination.

 

1.38                           “Termination Date” shall
mean November 30, 2003.

 

2.                                       Section 2.7
of the Credit Agreement is hereby amended by deleting the last two sentences of
said Section, and replacing them with the following:

 

In no event shall the Bank issue a standby Letter of Credit if, after
giving effect to such issuance, the sum of the L/C Exposure plus the
outstanding principal balances of the Current Note and the Consolidated Term
Note would exceed the Borrowing Base, and in no event shall the Bank issue a
documentary Letter of Credit if, after giving effect to such issuance, the
aggregate amount of all outstanding documentary Letters of Credit would exceed
$300,000.00.  The expiry date of each
documentary Letter of Credit must be no later than one year from the date of
its issuance.

 

3.                                       Section 3.2
of the Credit Agreement is hereby amended so that, when read in its entirety,
it provides as follows:

 

3.2                                 Interest on the unpaid
principal of the Consolidated Term Note shall accrue at a fixed annual rate
equal to (i) five percent (5.0%) during the period commencing October 1,
2002 through and including September 30, 2005, and (ii) seven and one-half
percent (7.50%) during the period commencing October 1, 2005 until the
Consolidated Term Note is paid in full.

 

4.                                       Section 8
of the Credit Agreement is hereby amended (i) by deleting Section 8.3 in
its entirety, and (ii) by changing Sections 8.2, 8.5, 8.6, 8.9 and 8.15 so
that, when read in their entireties, they provide as follows:

 

8.2                                 Subject to the
provisions of Section 10.9 hereof, permit its consolidated Tangible Net
Worth to be less than $4,600,000.00 as of June 30, 2003, and as of the end
of any fiscal year thereafter.

 

15

 

8.5                                 Subject to the
provisions of Section 10.9 hereof, permit its consolidated Leverage Ratio
to be greater than 2.0 to 1.0 as of June 30, 2003, and as of the end of
any fiscal year thereafter.

 

8.6                                 Subject to the
provisions of Section 10.9 hereof, permit its consolidated ratio of Funded
Debt to EBITDA to be greater than 2.75 to 1.0 for the fiscal year ending
June 30, 2003, and for each fiscal year thereafter.

 

8.9                                 Subject to the
provisions of Section 10.9 hereof, permit the consolidated aggregate
amount of Borrowed Money to exceed $100,000.00 as of June 30, 2003, and as
of the end of each fiscal year thereafter.

 

8.15                           Issue any treasury stock or
redeem any outstanding stock.

 

5.                                       Section 10.9
of the Credit Agreement is hereby amended so that, when read in its entirety,
it provides as follows:

 

10.9                           For purposes of calculating
compliance with the covenants set forth in Sections 8.2, 8.4, 8.5, 8.6, 8.8 and
8.9 hereof, consolidated data of the Borrower and ENF shall be used.

 

6.                                       Simultaneously
with the execution of this First Amendment, the Borrower shall execute and
deliver to the Bank a new promissory note (which, for purposes of this First
Amendment only, shall be referred to herein as the “New Revolving Note”) in the
face amount of $3,000,000.00, and in form and content acceptable to the
Bank.  The New Revolving Note shall
replace, but shall not be deemed payment or satisfaction of, the Current
Note.  All references in the Credit
Agreement to the “Current Note” shall be deemed to mean the New Revolving Note.

 

7.                                       The Borrower
hereby represents and warrants to the Bank as follows:

 

A.                                   As of the date of
this First Amendment, the outstanding principal balances of the Current Note
and the Consolidated Term Note are $0.00 and $3,827,390.88, respectively, and
accrued but unpaid interest thereon equals $0.00 and $14,884.30, respectively.

 

B.                                     As of the date of
this First Amendment, the L/C Exposure is $0.00, and the aggregate amount of
all outstanding documentary Letters of Credit is $23,682.14.

 

C.                                     The Credit
Agreement and the other documents executed by the Borrower in connection
therewith constitute valid, legal and binding obligations owed by the Borrower
to the Batik, subject to no defense, counterclaim, offset; abatement or
recoupment.

 

D.                                    As of the date of
this First Amendment, (i) each of the representations and warranties set forth
in Sections 6.1, 6.3 and 6.4 of the Credit Agreement is true, and (ii) there
exists no Event of Default, nor does there exist any event which, with the giving
of notice or the passage of time, or both, could become an Event of Default.

 

E.                                      As of the date of
this First Amendment, there are no unfulfilled obligations owed by the Borrower
under the purchase agreement relating to the Acquisition.

 

F.                                      The execution,
delivery and performance of this First Amendment and the New Revolving Note by
the Borrower are within its corporate powers, have been duly authorized, and
are not in contravention of law or the terms of the Borrower’s Articles of
Incorporation or By-laws, or of any undertaking to which the Borrower is a
party or by which it is bound.

 

G.                                     All financial
statements delivered to the Bank by or on behalf of the Borrower, including any
schedules and notes pertaining thereto, have been prepared in accordance with
Generally Accepted Accounting Principles consistently applied, and fully and
fairly present the financial condition of

 

16

 

the Borrower at the dates thereof and the results of operations for the
periods covered thereby, and there have been no material adverse, changes in
the financial condition or business of the Borrower from October 31, 2002
to the date hereof.

 

8.                                       Upon request by
the Bank, the Borrower shall deliver a corporate certificate of authority (or
incumbency certificate) to the Bank dated as of the date of this First
Amendment, and in form and content acceptable to the Bank.

 

9.                                       Except as
expressly modified by this First Amendment, the Credit Agreement remains
unchanged and in full force and effect.

 

IN WITNESS WHEREOF, the Borrower and the Bank have executed this First
Amendment as of the date first written above.

 

	
  WATERS INSTRUMENTS, INC.

  	
   

  	
  WELLS FARGO BANK MINNESOTA,

  NATIONAL ASSOCIATION

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
  /s/ Gregory Anshus

  	
   

  	
  By: 

  	
  /s/ Susan L. Reinke

  	
   

  
	
  Its:

  	
  CFO

  	
   

  	
   

  	
  Susan L. Reinke, Vice President

  

 

17

 

PROMISSORY NOTE

 

	
  $3,000,000.00

  	
   

  	
  Date: 
  Jan. 29, 2003

  

 

FOR VALUE RECEIVED, the undersigned, Waters Instruments, Inc., a
Minnesota corporation with offices in Plymouth, Minnesota, promises to pay on
November 30, 2003 to the order of Wells Fargo Bank Minnesota, National
Association (the “Bank”) at the Bank’s Rochester Office or at any other place
designated at any time by the holder hereof, in lawful money of the United
States of America, the principal sum of THREE MILLION AND NO/100 DOLLARS
($3,000,000.00), or so much thereof as is disbursed and remains outstanding
hereunder as shown by the Bank’s liability record on the dates payments are due
hereunder, together with interest on the unpaid balance hereof from the date
hereof until this Note is fully paid at an annual rate which, at all times,
shall be equal to one-half of one percent (0.50%) less than the Wall
Street Prime Rate (as defined in the Credit Agreement referred to below).  Interest shall be calculated on the basis of
actual number of days elapsed in a 360-day year.

 

Interest on this Note is payable monthly, commencing Feb. 28, 2003, and
continuing on the last day of each succeeding month, and upon maturity.

 

This Note constitutes the Current Note issued pursuant to the
provisions of that certain Term Loan And Credit Agreement dated August 6,
2001, as amended by a First Amendment of even date herewith (as amended, the
“Credit Agreement”), made between the undersigned and the Bank.  Reference is hereby made to the Credit
Agreement for statements of the terms pursuant to which the indebtedness
evidenced hereby was created, is secured, may be prepaid voluntarily, is
subject to mandatory prepayment, may be reborrowed and may be accelerated.

 

Unless prohibited by law, the undersigned agrees to pay all costs of
collection, including reasonable attorneys’ fees and legal expenses, incurred
by the holder hereof in the event this Note is not duly paid.  The holder hereof may change any terms of
payment of this Note, including extensions of time and renewals, and release
any security for, or any party to, this Note, without notifying or releasing
any accommodation maker, endorser or guarantor from liability in connection
with this Note.  Presentment or other
demand for payment, notice of dishonor and protest are hereby waived by the
undersigned and each endorser or guarantor. 
This Note shall be governed by the substantive laws of the State of
Minnesota.

 

	
   

  	
  WATERS INSTRUMENTS, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ Gregory Anshus

  	
   

  
	
   

  	
  Its:

  	
  CFO

  

 

18

 

SECOND AMENDMENT TO CREDIT AGREEMENT

 

THIS SECOND AMENDMENT is made as of the 16th day of December, 2003, and
is by and between Waters Instruments, Inc., a Minnesota corporation (the
“Borrower”), and Wells Fargo Bank Minnesota, National Association, a national
banking association (the “Bank”).

 

REFERENCE IS HEREBY MADE to that certain Term Loan And Credit Agreement
dated August 6, 2001, as amended (the “Credit Agreement”) made between the
Borrower and the Bank.  Capitalized
terms not otherwise defined herein shall have the respective meanings ascribed
to them in the Credit Agreement.

 

WHEREAS, the Borrower has requested the Bank (i) to release its lien on
certain collateral in connection with the sale and purchase of real estate by
the Borrower, and (ii) to renew the Credit to January 31, 2004; and,

 

WHEREAS, the Bank is willing to grant the Borrower’s requests, subject
to the provisions of this Second Amendment;

 

NOW, THEREFORE, in consideration of the premises and for other valuable
consideration received, it is agreed as follows:

 

1.                                       Section 1
of the Credit Agreement is hereby amended by changing Sections 1.12, 1.13 and
1.38 so that, when read in their entireties, they provide as follows:

 

1.12                           “Credit” shall mean a
revolving line of credit established by the Bank for the benefit of the
Borrower in the amount of $2,400,000.00.

 

1.13                           “Current Note” shall mean
the promissory note made by the Borrower in the face amount of $2,400,000.00,
evidencing indebtedness under the Credit.

 

1.38                           “Termination Date” shall
mean January 31, 2004.

 

2.                                       Section 2.1
of the Credit Agreement is hereby amended by changing the amount referenced in
clause (ii) from “THREE MILLION AND NO/100 DOLLARS ($3,000,000.00)” to “TWO
MILLION FOUR HUNDRED THOUSAND AND NO/100 DOLLARS ($2,400,000.00)”.

 

3.                                       Simultaneously
with the execution of this Second Amendment, the Borrower shall execute and
deliver to the Bank a new promissory note (which, for purposes of this Second
Amendment only, shall be referred to herein as the “New Revolving Note”) in the
face amount of $2,400,000.00, and in form and content acceptable to the
Bank.  The New Revolving Note shall
replace, but shall not be deemed payment or satisfaction of, the Current
Note.  All references in the Credit
Agreement to the “Current Note” shall be deemed to mean the New Revolving Note.

 

4.                                       The Borrower
hereby represents and warrants to the Bank as follows:

 

A.                                   As of the date of
this Second Amendment, the outstanding principal balances of the Current Note
and the Consolidated Term Note are $ 0.00 and $1,307,852.99, respectively, and
accrued but unpaid interest thereon equals $0.00 and $2,916.24, respectively.

 

B.                                     As of the date of
this Second Amendment, the L/C Exposure is $0.00, and the aggregate amount of
all outstanding documentary Letters of Credit is $9,825.00.

 

C.                                     The Credit
Agreement and the other documents executed by the Borrower in connection
therewith constitute valid, legal and binding obligations owed by the Borrower
to the Bank, subject to no defense, counterclaim, offset, abatement or
recoupment.

 

19

 

D.                                    As of the date of
this Second Amendment, (i) each of the representations and warranties set forth
in Sections 6.1, 6.3 and 6.4 of the Credit Agreement is true, and (ii) there
exists no Event of Default, nor does there exist any event which, with the
giving of notice or the passage of time, or both, could become an Event of
Default.

 

E.                                      As of the date of
this Second Amendment, there are no unfulfilled obligations owed by the
Borrower under the purchase agreement relating to the Acquisition.

 

F.                                      The execution,
delivery and performance of this Second Amendment and the New Revolving Note by
the Borrower are within its corporate powers, have been duly authorized, and
are not in contravention of law or the terms of the Borrower’s Articles of
Incorporation or Bylaws, or of any undertaking to which the Borrower is a party
or by which it is bound.

 

G.                                     All financial
statements delivered to the Bank by or on behalf of the Borrower, including any
schedules and notes pertaining thereto, have been prepared in accordance with
Generally Accepted Accounting Principles consistently applied, and fully and
fairly present the financial condition of the Borrower at the dates thereof and
the results of operations for the periods covered thereby, and there have been
no material adverse changes in the financial condition or business of the Borrower
from October 31, 2003 to the date hereof.

 

5.                                       Upon request by
the Bank, the Borrower shall deliver a corporate certificate of authority (or
incumbency certificate) to the Bank dated as of the date of this Second
Amendment, and in form and content acceptable to the Bank.

 

6.                                       Except as
expressly modified by this Second Amendment, the Credit Agreement remains
unchanged and in full force and effect.

 

IN WITNESS WHEREOF, the Borrower and the Bank have executed this Second
Amendment as of the date first written above.

 

	
  WATERS INSTRUMENTS, INC.

  	
  WELLS FARGO BANK MINNESOTA,

  NATIONAL ASSOCIATION

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
  /s/ Gregg Anshus

  	
   

  	
  By: 

  	
   /s/ Susan L. Reinke

  	
   

  
	
  Its:

  	
  CFO

  	
   

  	
   

  	
  Susan L. Reinke, Vice President

  

 

20

 

PROMISSORY NOTE

 

	
  $2,400,000.00

  	
   

  	
  Date: 
  December 16, 2003

  

 

FOR VALUE RECEIVED, the undersigned, Waters Instruments, Inc., a
Minnesota corporation with offices in Rochester, Minnesota, promises to pay on
January 31, 2004 to the order of Wells Fargo Bank Minnesota, National
Association (the “Bank”) at the Bank’s Rochester Office or at any other place
designated at any time by the holder hereof, in lawful money of the United
States of America, the principal sum of TWO MILLION FOUR HUNDRED THOUSAND AND
NO/100 DOLLARS ($2,400,000.00), or so much thereof as is disbursed and remains
outstanding hereunder as shown by the Bank’s liability record on the dates
payments are due hereunder, together with interest on the unpaid balance hereof
from the date hereof until this Note is fully paid at an annual rate which, at
all times, shall be equal to one-half of one percent (0.50%) less the Wall
Street Prime Rate (as defined in the Credit Agreement referred to below).  Interest shall be calculated on the basis of
actual number of days elapsed in a 360-day year.

 

Interest on this Note is payable monthly, commencing December 31,
2003, and upon maturity.

 

This Note constitutes the Current Note issued pursuant to the
provisions of that certain Term Loan And Credit Agreement dated August 6,
2001, as amended by a series of amendments, including a Second Amendment of
even date herewith (as amended, the “Credit Agreement”), made between the
undersigned and the Bank.  Reference is
hereby made to the Credit Agreement for statements of the terms pursuant to
which the indebtedness evidenced hereby was created, is secured, may be prepaid
voluntarily, is subject to mandatory prepayment, may be reborrowed and may be
accelerated.

 

Unless prohibited by law, the undersigned agrees to pay all costs of
collection, including reasonable attorneys’ fees and legal expenses, incurred
by the holder hereof in the event this Note is not duly paid.  The holder hereof may change any terms of
payment of this Note, including extensions of time and renewals, and release
any security for, or any party to, this Note, without notifying or releasing
any accommodation maker, endorser or guarantor from liability in connection
with this Note.  Presentment or other
demand for payment, notice of dishonor and protest are hereby waived by the
undersigned and each endorser or guarantor. 
This Note shall be governed by the substantive laws of the State of
Minnesota.

 

	
   

  	
  WATERS INSTRUMENTS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ Gregg Anshus

  
	
   

  	
  Its:

  	
  CFO

  

 

21

 

THIRD AMENDMENT TO CREDIT AGREEMENT

 

THIS THIRD AMENDMENT is made as of the 30 day of January, 2004, and is
by and between Waters Instruments, Inc., a Minnesota corporation (the
“Borrower”), and Wells Fargo Bank Minnesota, National Association, a national
banking association (the “Bank”).

 

REFERENCE IS HEREBY MADE to that certain Term Loan And Credit Agreement
dated August 6, 2001, as amended (the “Credit Agreement”) made between the
Borrower and the Bank.  Capitalized
terms not otherwise defined herein shall have the respective meanings ascribed
to them in the Credit Agreement.

 

WHEREAS, the Borrower has requested the Bank (i) to increase the amount
and extend the maturity date of the Credit, and (ii) increase the amount
available for documentary letters of credit; and,

 

WHEREAS, the Bank is willing to grant the Borrower’s requests, subject
to the provisions of this Third Amendment;

 

NOW, THEREFORE, in consideration of the premises and for other valuable
consideration received, it is agreed as follows:

 

1.                                       Section 1
of the Credit Agreement is hereby amended by changing Sections 1.12, 1.13 and
1.38 so that, when read in their entireties, they provide as follows:

 

1.12                           “Credit” shall mean a
revolving line of credit established by the Bank for the benefit of the Borrower
in the amount of $3,000,000.00.

 

1.13                           “Current Note” shall mean
the promissory note made by the Borrower in the face amount of 3,000,000.00,
evidencing indebtedness under the Credit.

 

1.38                           “Termination Date” shall
mean November 30, 2004.

 

2.                                       Section 2.1
of the Credit Agreement is hereby amended by changing the amount referenced in
clause (ii) from “TWO MILLION FOUR HUNDRED THOUSAND AND NO/100 DOLLARS
($2,400,000.00)” to “THREE MILLION AND NO/ 100 DOLLARS ($3,000,000.00)”.

 

3.                                       Section 2.6
of the Credit Agreement is hereby amended in its entirety to read as follows:

 

2.6                                 If, at any time and
from time to time, the sum of the aggregate outstanding principal balance of
the Current Note plus the L/C Exposure exceeds the Borrowing Base, the Borrower
shall immediately make a prepayment of principal of the Current Note in an
amount sufficient to eliminate such excess.

 

4.                                       Section 2.7
of the Credit Agreement is hereby amended by changing the maximum aggregate
amount of outstanding documentary Letters of Credit from “$300,000.00” to
“$400,000.00”.

 

5.                                       Section 3.5
of the Credit Agreement is hereby deleted in its entirety, without replacement.

 

6.                                       Section 8.2
of the Credit Agreement is hereby amended by changing the minimum Tangible Net
Worth from “$4,600,000.00” to “$5,750,000.00”.

 

7.                                       Section 8.8
of the Credit Agreement is hereby amended by changing the minimum consolidated
expenditures for fixed assets and capitalized leases from “$525,000.00” to
“$2,620,000.00”.

 

8.                                       Simultaneously
with the execution of this Third Amendment, the Borrower shall execute and
deliver to the Bank a new promissory note (which, for purposes of this Third
Amendment only, shall be referred to herein

 

22

 

as the “New Revolving Note”) in the face amount of $3,000,000.00, and
in form and content acceptable to the Bank. 
The New Revolving Note shall replace, but shall not be deemed payment or
satisfaction of, the Current Note.  All
references in the Credit Agreement to the “Current Note” shall be deemed to
mean the New Revolving Note.

 

9.                                       The Borrower
hereby represents and warrants to the Bank as follows:

 

A.                                   As of the date of
this Third Amendment, the outstanding principal balances of the Current Note
and the Consolidated Term Note are $0 and $1,233,733.92, respectively, and
accrued but unpaid interest thereon equals $0 and $5,311.91, respectively.

 

B.                                     As of the date of
this Third Amendment, the L/C Exposure is $0, and the aggregate amount of all
outstanding documentary Letters of Credit is $146,875.00.

 

C.                                     The Credit
Agreement and the other documents executed by the Borrower in connection
therewith constitute valid, legal and binding obligations owed by the Borrower
to the Bank, subject to no defense, counterclaim, offset, abatement or
recoupment.

 

D.                                    As of the date of
this Third Amendment, (i) each of the representations and warranties set forth
in Sections 6.1, 6.3 and 6.4 of the Credit Agreement is true, and (ii) there
exists no Event of Default, nor does there exist any event which, with the
giving of notice or the passage of time, or both, could become an Event of
Default.

 

E.                                      As of the date of
this Third Amendment, there are no unfulfilled obligations owed by the Borrower
under the purchase agreement relating to the Acquisition.

 

F.                                      The execution,
delivery and performance of this Third Amendment and the New Revolving Note by
the Borrower are within its corporate powers, have been duly authorized, and
are not in contravention of law or the terms of the Borrower’s Articles of
Incorporation or By-laws, or of any undertaking to which the Borrower is a
party or by which it is bound.

 

G.                                     All financial
statements delivered to the Bank by or on behalf of the Borrower, including any
schedules and notes pertaining thereto, have been prepared in accordance with
Generally Accepted Accounting Principles consistently applied, and fully and
fairly present the financial condition of the Borrower at the dates thereof and
the results of operations for the periods covered thereby, and there have been
no material adverse changes in the financial condition or business of the
Borrower from 11/30, 2003 to the date hereof.

 

10.                                 Upon request by the
Bank, the Borrower shall deliver a corporate certificate of authority (or
incumbency certificate) to the Bank dated as of the date of this Third
Amendment, and in form and content acceptable to the Bank.

 

11.                                 Except as expressly
modified by this Third Amendment, the Credit Agreement remains unchanged and in
full force and effect.

 

IN WITNESS WHEREOF, the Borrower and the Bank have executed this Third
Amendment as of the date first written above.

 

	
  WATERS INSTRUMENTS, INC.

  	
  WELLS FARGO BANK MINNESOTA,

  NATIONAL ASSOCIATION

  
	
   

  	
   

  	
   

  
	
  By:

  	
  /s/ Gregg Anshus

  	
   

  	
  By: 

  	
   /s/   Susan L. Reinke

  	
   

  
	
  Its:

  	
  CFO

  	
   

  	
   

  	
  Susan L. Reinke, Vice President

  

 

23

 

PROMISSORY NOTE

 

	
  $3,000,000.00

  	
  Date:  January 30, 2004

  

 

FOR VALUE RECEIVED, the undersigned, Waters Instruments, Inc., a
Minnesota corporation with offices in Plymouth, Minnesota, promises to pay on
November 30, 2004 to the order of Wells Fargo Bank Minnesota, National
Association (the “Bank”) at the Bank’s Rochester Office or at any other place
designated at any time by the holder hereof, in lawful money of the United
States of America, the principal sum of THREE MILLION AND NO/100 DOLLARS
($3,000,000.00), or so much thereof as is disbursed and remains outstanding
hereunder as shown by the Bank’s liability record on the dates payments are due
hereunder, together with interest on the unpaid balance hereof from the date
hereof until this Note is fully paid at an annual rate which, at all times,
shall be equal to one-half of one percent (0.50%) less than the Wall
Street Prime Rate (as defined in the Credit Agreement referred to below).  Interest shall be calculated on the basis of
actual number of days elapsed in a 360-day year.

 

Interest on this Note is payable monthly, commencing February 29,
2004, and continuing on the last day of each succeeding month, and upon
maturity.

 

This Note constitutes the Current Note issued pursuant to the
provisions of that certain Term Loan And Credit Agreement dated August 6,
2001, as amended by a series of amendments, including a Third Amendment of even
date herewith (as amended, the “Credit Agreement”), made between the undersigned
and the Bank.  Reference is hereby made
to the Credit Agreement for statements of the terms pursuant to which the
indebtedness evidenced hereby was created, is secured, may be prepaid
voluntarily, is subject to mandatory prepayment, may be reborrowed and may be
accelerated.

 

Unless prohibited by law, the undersigned agrees to pay all costs of
collection, including reasonable attorneys’ fees and legal expenses, incurred
by the holder hereof in the event this Note is not duly paid.  The holder hereof may change any terms of
payment of this Note, including extensions of time and renewals, and release
any security for, or any party to, this Note, without notifying or releasing
any accommodation maker, endorser or guarantor from liability in connection
with this Note.  Presentment or other
demand for payment, notice of dishonor and protest are hereby waived by the
undersigned and each endorser or guarantor. 
This Note shall be governed by the substantive laws of the State of
Minnesota.

 

	
   

  	
  WATERS INSTRUMENTS, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Gregg Anshus

  
	
   

  	
  Its:

  	
  CFO

  

 

24

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