Document:

exv4w1

 

Exhibit 4.1

WINLAND ELECTRONICS, INC.

and

WELLS FARGO BANK MINNESOTA, N.A.

Rights Agreement

Dated as of December 9, 2003

 

 

TABLE OF CONTENTS

	 	 	 	 	 	 
	 	 	 	 	 	Page
	 	 	 	 	 	Number
	 	 	 	 	 	

	 	Section 1
	 	Definitions
	 	1

	 	Section 2
	 	Appointment of Rights Agent
	 	7

	 	Section 3
	 	Issue of Right Certificates
	 	7

	 	Section 4
	 	Form of Right Certificates
	 	10

	 	Section 5
	 	Countersignature and Registration
	 	10

	 	Section 6
	 	Transfer, Split Up, Combination and Exchange of Right Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates
	 	11

	 	Section 7
	 	Exercise of Rights; Purchase Price; Expiration Date of Rights
	 	12

	 	Section 8
	 	Cancellation and Destruction of Right Certificates
	 	14

	 	Section 9
	 	Availability of Preferred Shares
	 	14

	 	Section 10
	 	Preferred Shares Record Date
	 	15

	 	Section 11
	 	Adjustment of Purchase Price, Number of Shares or Number of Rights
	 	16

	 	Section 12
	 	Certificate of Adjusted Purchase Price or Number of Shares
	 	26

	 	Section 13
	 	Consolidation, Merger, Statutory Share Exchange or Sale or Transfer of Assets or Earning Power
	 	26

	 	Section 14
	 	Fractional Rights and Fractional Shares
	 	29

	 	Section 15
	 	Rights of Action
	 	31

	 	Section 16
	 	Agreement of Right Holders
	 	31

	 	Section 17
	 	Right Certificate Holder Not Deemed a Shareholder
	 	32

	 	Section 18
	 	Concerning the Rights Agent
	 	33

	 	Section 19
	 	Merger or Consolidation or Change of Name of Rights Agent
	 	33

	 	Section 20
	 	Duties of Rights Agent
	 	34

	 	Section 21
	 	Change of Rights Agent
	 	37

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	Section 22
	 	Issuance of New Right Certificates
	 	39

	Section 23
	 	Redemption
	 	39

	Section 24
	 	Exchange
	 	40

	Section 25
	 	Notice of Certain Events
	 	42

	Section 26
	 	Notices
	 	43

	Section 27
	 	Supplements and Amendments
	 	44

	Section 28
	 	Successors
	 	45

	Section 29
	 	Benefits of this Agreement
	 	45

	Section 30
	 	Severability
	 	46

	Section 31
	 	Governing Law
	 	46

	Section 32
	 	Counterparts
	 	47

	Section 33
	 	Descriptive Headings
	 	47

	Signatures
	 	 
	 	47

	 	 	 	 	 
	Exhibit A	 	
-
	 	Form of Certificate of Designations
	Exhibit B	 	
-
	 	Form of Right Certificate
	Exhibit C	 	
-
	 	Summary of Rights to Purchase Preferred Shares

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     Agreement, dated as of December 9, 2003, between Winland Electronics,
Inc., a Minnesota corporation (the “Company”), and Wells Fargo Bank Minnesota,
N.A., as rights agent (the “Rights Agent”).

     The Board of Directors of the Company has authorized and declared a
dividend of one preferred share purchase right (a “Right”) for each Common
Share (as hereinafter defined) of the Company outstanding at the close of
business on December 31, 2003 (the “Record Date”), each Right representing the
right to purchase one one-hundredth of a Preferred Share (as hereinafter
defined), upon the terms and subject to the conditions herein set forth, and
has further authorized and directed the issuance of one Right with respect to
each Common Share that shall become outstanding between the Record Date and the
earliest of the Distribution Date, the Redemption Date and the Final Expiration
Date (as such terms are hereinafter defined).

     Accordingly, in consideration of the premises and the mutual agreements
herein set forth, the parties hereby agree as follows:

     Section 1. Definitions. For purposes of this Agreement, the following
terms have the meanings indicated:

     (a) “Acquiring Person” shall mean any Person who or which, together with
all Affiliates and Associates of such Person, shall be the Beneficial Owner of
15% or more of the Common Shares of the Company then outstanding other than as
a result of a Permitted Offer, but shall not include the Company, any
Subsidiary of the Company, any employee benefit plan of the Company or any
Subsidiary of the Company, or any entity holding Common Shares for or pursuant
to the terms of any such plan. Notwithstanding the foregoing, no Person shall
become an “Acquiring Person” as the result of an acquisition of Common Shares
by the Company which,

 

 

by reducing the number of Common Shares of the Company outstanding,
increases the proportionate number of Common Shares of the Company beneficially
owned by such Person to 15% or more of the Common Shares of the Company then
outstanding; provided, however, that, if a Person shall become the Beneficial
Owner of 15% or more of the Common Shares of the Company then outstanding by
reason of share purchases by the Company and shall, after such share purchases
by the Company, become the Beneficial Owner of any additional Common Shares of
the Company, then such Person shall be deemed to be an “Acquiring Person.”
Notwithstanding the foregoing, if the Board of Directors of the Company
determines in good faith that a Person who would otherwise be an “Acquiring
Person,” as defined pursuant to the foregoing provisions of this paragraph (a),
has become such inadvertently, and such Person divests as promptly as
practicable a sufficient number of Common Shares so that such Person would no
longer be an “Acquiring Person,” as defined pursuant to the foregoing
provisions of this paragraph (a), then such Person shall not be deemed to be an
“Acquiring Person” for any purposes of this Agreement. Notwithstanding the
foregoing, if, as of the date of this Agreement or prior to the first public
announcement of the adoption of this Agreement, any Person is or becomes the
Beneficial Owner of 15% or more of the Common Shares of the Company then
outstanding, such Person shall not be deemed to be or to become an “Acquiring
Person” unless and until such time as such Person shall, after the first public
announcement of the adoption of this Agreement, become the Beneficial Owner of
additional Common Shares of the Company (other than pursuant to a dividend or
distribution paid or made by the Company on the outstanding Common Shares or
pursuant to a split or subdivision of the outstanding Common Shares), unless,
upon becoming the Beneficial Owner of such additional Common Shares, such
Person is not then the Beneficial Owner of 15% or more of the Common Shares of
the Company then outstanding.

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     (b) “Affiliate” shall have the meaning ascribed to such term in Rule 12b-2
of the General Rules and Regulations under the Exchange Act as in effect on the
date of this Agreement.

     (c) “Associate” shall have the meaning ascribed to such term in Rule 12b-2
of the General Rules and Regulations under the Exchange Act as in effect on the
date of this Agreement.

     (d) A Person shall be deemed the “Beneficial Owner” of and shall be deemed
to “beneficially own” any securities:

   (i) which such Person or any of such Person’s Affiliates or
Associates beneficially owns, directly or indirectly;

   (ii) which such Person or any of such Person’s Affiliates or
Associates has (A) the right to acquire (whether such right is
exercisable immediately or only after the passage of time) pursuant to
any agreement, arrangement or understanding (other than customary
agreements with and between underwriters and selling group members with
respect to a bona fide public offering of securities), or upon the
exercise of conversion rights, exchange rights, rights (other than these
Rights), warrants or options, or otherwise; provided, however, that a
Person shall not be deemed the Beneficial Owner of, or to beneficially
own, securities tendered pursuant to a tender or exchange offer made by
or on behalf of such Person or any of such Person’s Affiliates or
Associates until such tendered securities are accepted for purchase or
exchange; or (B) the right to vote pursuant to any agreement, arrangement
or understanding; provided, however, that a Person shall not be deemed
the Beneficial Owner of, or to beneficially own, any security if the
agree-

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ment, arrangement or understanding to vote such security (1) arises
solely from a revocable proxy or consent given to such Person in response
to a public proxy or consent solicitation made pursuant to, and in
accordance with, the applicable rules and regulations promulgated under
the Exchange Act and (2) is not also then reportable on Schedule 13D
under the Exchange Act (or any comparable or successor report); or

   (iii) which are beneficially owned, directly or indirectly, by any
other Person with which such Person or any of such Person’s Affiliates or
Associates has any agreement, arrangement or understanding (other than
customary agreements with and between underwriters and selling group
members with respect to a bona fide public offering of securities) for
the purpose of acquiring, holding, voting (except to the extent
contemplated by the proviso to Section 1(d)(ii)(B) hereof) or disposing
of any securities of the Company.

     Notwithstanding anything in this definition of Beneficial Ownership to the
contrary, the phrase “then outstanding,” when used with reference to a Person’s
Beneficial Ownership of securities of the Company, shall mean the number of
such securities then issued and outstanding together with the number of such
securities not then actually issued and outstanding which such Person would be
deemed to own beneficially hereunder.

     (e) “Business Day” shall mean any day other than a Saturday, a Sunday, or
a day on which banking institutions in Minnesota are authorized or obligated by
law or executive order to close.

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     (f) “Close of Business” on any given date shall mean 5:00 P.M.,
Minneapolis time, on such date; provided, however, that, if such date is not a
Business Day, it shall mean 5:00 P.M., Minneapolis time, on the next succeeding
Business Day.

     (g) “Common Shares” when used with reference to the Company shall mean the
shares of common stock, par value $.01 per share, of the Company. “Common
Shares” when used with reference to any Person other than the Company shall
mean the capital stock (or equity interest) with the greatest voting power of
such other Person or, if such other Person is a Subsidiary of another Person,
the Person or Persons which ultimately control such first-mentioned Person.

     (h) “Distribution Date” shall have the meaning set forth in Section 3(a)
hereof.

     (i) “Exchange Act” shall mean the Securities Exchange Act of 1934, as
amended.

     (j) “Exchange Ratio” shall have the meaning set forth in Section 24(a)
hereof.

     (k) “Final Expiration Date” shall have the meaning set forth in Section
7(a) hereof.

     (l) “NASDAQ” shall mean the National Association of Securities Dealers,
Inc. Automated Quotation System.

     (m) “Permitted Offer” shall mean a tender offer or an exchange offer for
all outstanding Common Shares of the Company determined by the Board of
Directors of the Com-

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pany, after receiving such advice as it deems necessary and giving due
consideration to all relevant factors, to be in the best interests of the
Company and its shareholders.

     (n) “Person” shall mean any individual, firm, corporation or other entity,
and shall include any successor (by merger or otherwise) of such entity.

     (o) “Preferred Shares” shall mean shares of Series A Junior Participating
Preferred Stock, par value $.01 per share, of the Company having the rights and
preferences set forth in the Form of Certificate of Designations attached to
this Agreement as Exhibit A.

     (p) “Purchase Price” shall have the meaning set forth in Section 4 hereof.

     (q) “Record Date” shall have the meaning set forth in the second paragraph
hereof.

     (r) “Redemption Date” shall have the meaning set forth in Section 7(a)
hereof.

     (s) “Redemption Price” shall have the meaning set forth in Section 23(a)
hereof.

     (t) “Right” shall have the meaning set forth in the second paragraph
hereof.

     (u) “Right Certificate” shall have the meaning set forth in Section 3(a)
hereof.

     (v) “Shares Acquisition Date” shall mean the first date of public
announcement by the Company or an Acquiring Person that an Acquiring Person has
become such.

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     (w) “Subsidiary” of any Person shall mean any corporation or other entity
of which a majority of the voting power of the voting equity securities or
equity interest is owned, directly or indirectly, by such Person.

     (x) “Summary of Rights” shall have the meaning set forth in Section 3(b)
hereof.

     (y) “Trading Day” shall have the meaning set forth in Section 11(d)
hereof.

     Section 2. Appointment of Rights Agent. The Company hereby appoints the
Rights Agent to act as agent for the Company and the holders of the Rights
(who, in accordance with Section 3 hereof, shall, prior to the Distribution
Date, also be the holders of the Common Shares of the Company) in accordance
with the terms and conditions hereof, and the Rights Agent hereby accepts such
appointment. The Company may from time to time appoint such co-Rights Agents
as it may deem necessary or desirable.

     Section 3. Issue of Right Certificates. (a) Until the earlier of (i) the
fifteenth day after the Shares Acquisition Date or (ii) the fifteenth Business
Day (or such later date as may be determined by action of the Board of
Directors of the Company prior to such time as any Person becomes an Acquiring
Person) after the date of the commencement by any Person (other than the
Company, any Subsidiary of the Company, any employee benefit plan of the
Company or a Subsidiary of the Company or any entity holding Common Shares of
the Company for or pursuant to the terms of any such plan) of a tender or
exchange offer the consummation of which would result in any Person becoming an
Acquiring Person (including any such date which is after the date of this
Agreement and prior to the issuance of the Rights; the earlier of such dates being
herein referred to as the “Distribution Date”), (x) the Rights will be
evidenced (subject to

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the provisions of Section 3(b) hereof) by the
certificates for Common Shares of the Company registered in the names of the
holders thereof (which certificates shall also be deemed to be Right
Certificates) and not by separate Right Certificates, and (y) the right to
receive Right Certificates will be transferable only in connection with the
transfer of Common Shares of the Company. As soon as practicable after the
Distribution Date, the Company will prepare and execute, the Rights Agent will
countersign, and the Company will send or cause to be sent (and the Rights
Agent will, if requested, send) by first-class, insured, postage-prepaid mail,
to each record holder of Common Shares of the Company as of the Close of
Business on the Distribution Date, at the address of such holder shown on the
records of the Company, a Right Certificate, in substantially the form of
Exhibit B hereto (a “Right Certificate”), evidencing one Right for each Common
Share so held. As of the Distribution Date, the Rights will be evidenced
solely by such Right Certificates.

     (b) On the Record Date, or as soon as practicable thereafter, the Company
will send a copy of a Summary of Rights to Purchase Preferred Shares, in
substantially the form of Exhibit C hereto (the “Summary of Rights”), by
first-class, postage-prepaid mail, to each record holder of Common Shares as of
the Close of Business on the Record Date, at the address of such holder shown
on the records of the Company. With respect to certificates for Common Shares
of the Company outstanding as of the Record Date, until the Distribution Date,
the Rights will be evidenced by such certificates registered in the names of
the holders thereof together with a copy of the Summary of Rights attached
thereto. Until the Distribution Date (or the earlier of the Redemption Date or
the Final Expiration Date), the surrender for transfer of any certificate for
Common Shares of the Company outstanding on the Record Date, with or
without a copy of the

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Summary of Rights attached thereto, shall also constitute
the transfer of the Rights associated with the Common Shares of the Company
represented thereby.

     (c) Certificates for Common Shares which become outstanding (including,
without limitation, reacquired Common Shares referred to in the last sentence
of this paragraph (c)) after the Record Date but prior to the earliest of the
Distribution Date, the Redemption Date or the Final Expiration Date shall have
impressed on, printed on, written on or otherwise affixed to them the following
legend:

This certificate also evidences and entitles the holder hereof to certain
rights as set forth in an Agreement between Winland Electronics, Inc. and
Wells Fargo Bank Minnesota, N.A., dated as of December 9, 2003, as it may
be amended from time to time (the “Agreement”), the terms of which are
hereby incorporated herein by reference and a copy of which is on file at
the principal executive offices of Winland Electronics, Inc. Under
certain circumstances, as set forth in the Agreement, such Rights (as
defined in the Agreement) will be evidenced by separate certificates and
will no longer be evidenced by this certificate. Winland Electronics,
Inc. will mail to the holder of this certificate a copy of the Agreement
without charge after receipt of a written request therefor. As set forth
in the Agreement, Rights beneficially owned by any Person (as defined in
the Agreement) who becomes an Acquiring Person (as defined in the
Agreement) become null and void.

With respect to such certificates containing the foregoing legend, until the
Distribution Date, the Rights associated with the Common Shares of the Company
represented by such certificates shall be evidenced by such certificates alone,
and the surrender for transfer of any such certificate shall also constitute
the transfer of the Rights associated with the Common Shares of the Company
represented thereby. In the event that the Company purchases or acquires any
Common Shares of the Company after the Record Date but prior to the
Distribution Date, any Rights associated with such Common Shares of the Company
shall be deemed cancelled and retired so
that the Company shall not be entitled to exercise any Rights associated with
the Common Shares of the Company which are no longer outstanding.

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     Section 4. Form of Right Certificates. The Right Certificates (and the
forms of election to purchase Preferred Shares and of assignment to be printed
on the reverse thereof) shall be substantially the same as Exhibit B hereto,
and may have such marks of identification or designation and such legends,
summaries or endorsements printed thereon as the Company may deem appropriate
and as are not inconsistent with the provisions of this Agreement, or as may be
required to comply with any applicable law or with any applicable rule or
regulation made pursuant thereto or with any applicable rule or regulation of
any stock exchange or the National Association of Securities Dealers, Inc., or
to conform to usage. Subject to the provisions of Section 22 hereof, the Right
Certificates shall entitle the holders thereof to purchase such number of one
one-hundredths of a Preferred Share as shall be set forth therein at the price
per one one-hundredth of a Preferred Share set forth therein (the “Purchase
Price”), but the number of such one one-hundredths of a Preferred Share and the
Purchase Price shall be subject to adjustment as provided herein.

     Section 5. Countersignature and Registration. The Right Certificates
shall be executed on behalf of the Company by its Chairman of the Board, its
Chief Executive Officer, its President, any of its Vice Presidents or its
Treasurer, either manually or by facsimile signature and shall be attested by
the Secretary or an Assistant Secretary of the Company, either manually or by
facsimile signature. The Right Certificates shall be countersigned, either
manually or by facsimile signature, by the Rights Agent and shall not be valid
for any purpose unless countersigned. In case any officer of the Company who
shall have signed any of the Right Certificates shall cease to be such officer
of the Company before countersignature by the Rights Agent and issuance and
delivery by the Company, such Right Certificates, nevertheless, may be
countersigned by the Rights Agent and issued and delivered by the Company with
the same force and

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effect as though the individual who signed such Right
Certificates had not ceased to be such officer of the Company; and any Right
Certificate may be signed on behalf of the Company by any individual who, at
the actual date of the execution of such Right Certificate, shall be a proper
officer of the Company to sign such Right Certificate, although at the date of
the execution of this Agreement any such individual was not such an officer.

     Following the Distribution Date, the Rights Agent will keep or cause to be
kept, at its principal office, books for registration and transfer of the Right
Certificates issued hereunder. Such books shall show the names and addresses
of the respective holders of the Right Certificates, the number of Rights
evidenced on its face by each of the Right Certificates and the date of each of
the Right Certificates.

     Section 6. Transfer, Split Up, Combination and Exchange of Right
Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates. Subject
to the provisions of Section 14 hereof, at any time after the Close of Business
on the Distribution Date, and at or prior to the Close of Business on the
earlier of the Redemption Date or the Final Expiration Date, any Right
Certificate or Right Certificates (other than Right Certificates representing
Rights that have become void pursuant to Section 11(a)(ii) hereof or that have
been exchanged pursuant to Section 24 hereof) may be transferred, split up,
combined or exchanged for another Right Certificate or Right Certificates
entitling the registered holder to purchase a like number of one one-hundredths
of a Preferred
Share as the Right Certificate or Right Certificates surrendered then
entitled such holder to purchase. Any registered holder desiring to transfer,
split up, combine or exchange any Right Certificate or Right Certificates shall
make such request in writing delivered to the Rights Agent, and shall surrender
the Right Certificate or Right Certificates to be transferred, split up,
combined or exchanged at the principal office of the Rights Agent. Thereupon

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the Rights Agent shall countersign and deliver to the Person entitled thereto a
Right Certificate or Right Certificates, as the case may be, as so requested.
The Company may require payment of a sum sufficient to cover any tax or
governmental charge that may be imposed in connection with any transfer, split
up, combination or exchange of Right Certificates.

     Upon receipt by the Company and the Rights Agent of evidence reasonably
satisfactory to them of the loss, theft, destruction or mutilation of a Right
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to them, and, at the Company’s request,
reimbursement to the Company and the Rights Agent of all reasonable expenses
incidental thereto, and upon surrender to the Rights Agent and cancellation of
the Right Certificate if mutilated, the Company will make and deliver a new
Right Certificate of like tenor to the Rights Agent for delivery to the
registered holder in lieu of the Right Certificate so lost, stolen, destroyed
or mutilated.

     Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights.
(a) The registered holder of any Right Certificate may exercise the Rights
evidenced thereby (except as otherwise provided herein), in whole or in part,
at any time after the Distribution Date, upon surrender of the Right
Certificate, with the form of election to purchase on the reverse side thereof
duly executed, to the Rights Agent at the principal office of the Rights Agent,
together with payment of the Purchase Price for each one one-hundredth of a
Preferred Share as to which the Rights are exercised, at or prior to the
earliest of (i) the Close of Business on December 9, 2013 (the “Final
Expiration Date”), (ii) the time at which the Rights are redeemed as provided
in Section 23 hereof (the “Redemption Date”), or (iii) the time at which such
Rights are exchanged as provided in Section 24 hereof.

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     (b) The Purchase Price for each one one-hundredth of a Preferred Share
purchasable pursuant to the exercise of a Right shall initially be $36, and
shall be subject to adjustment from time to time as provided in Section 11 or
13 hereof, and shall be payable in lawful money of the United States of America
in accordance with paragraph (c) below.

     (c) Upon receipt of a Right Certificate representing exercisable Rights,
with the form of election to purchase duly executed, accompanied by payment of
the Purchase Price for the shares to be purchased and an amount equal to any
applicable transfer tax required to be paid by the holder of such Right
Certificate in accordance with Section 9 hereof by certified check, cashier’s
check or money order payable to the order of the Company, the Rights Agent
shall thereupon promptly (i) (A) requisition from any transfer agent of the
Preferred Shares certificates for the number of Preferred Shares to be
purchased and the Company hereby irrevocably authorizes any such transfer agent
to comply with all such requests, or (B) requisition from the depositary agent
depositary receipts representing such number of one one-hundredths of a
Preferred Share as are to be purchased (in which case certificates for the
Preferred Shares represented by such receipts shall be deposited by the
transfer agent of the Preferred Shares with such depositary agent) and the
Company hereby directs such depositary agent to comply with such request; (ii) when appropriate, requisition from the Company the amount of
cash to be paid in lieu of issuance of fractional shares in accordance with
Section 14 hereof; (iii) promptly after receipt of such certificates or
depositary receipts, cause the same to be delivered to or upon the order of the
registered holder of such Right Certificate, registered in such name or names
as may be designated by such holder; and (iv) when appropriate, after receipt,
promptly deliver such cash to or upon the order of the registered holder of
such Right Certificate.

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     (d) In case the registered holder of any Right Certificate shall exercise
less than all the Rights evidenced thereby, a new Right Certificate evidencing
Rights equivalent to the Rights remaining unexercised shall be issued by the
Rights Agent to registered holder of such Right Certificate or to such
holder’s duly authorized assigns, subject to the provisions of Section 14
hereof.

     Section 8. Cancellation and Destruction of Right Certificates. All Right
Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or to any of its
agents, be delivered to the Rights Agent for cancellation or in cancelled form,
or, if surrendered to the Rights Agent, shall be cancelled by it, and no Right
Certificates shall be issued in lieu thereof except as expressly permitted by
any of the provisions of this Agreement. The Company shall deliver to the
Rights Agent for cancellation and retirement, and the Rights Agent shall so
cancel and retire, any other Right Certificate purchased or acquired by the
Company otherwise than upon the exercise thereof. The Rights Agent shall
deliver all cancelled Right Certificates to the Company, or shall, at the
written request of the Company, and after any Securities and Exchange
Commission required retention period, destroy such cancelled Right Certificates,
and, in such case, shall deliver a
certificate of destruction thereof to the Company.

     Section 9. Availability of Preferred Shares. The Company covenants and
agrees that it will cause to be reserved and kept available out of its
authorized and unissued Preferred Shares the number of Preferred Shares that
will be sufficient to permit the exercise in full of all outstanding Rights in
accordance with Section 7 hereof. The Company covenants and agrees that it
will take all such action as may be necessary to ensure that all Preferred
Shares delivered upon exercise of Rights shall, at the time of delivery of the
certificates for such Preferred

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Shares (subject to payment of the Purchase
Price), be duly and validly authorized and issued and fully paid and
nonassessable shares.

     The Company further covenants and agrees that it will pay when due and
payable any and all federal and state transfer taxes and charges which may be
payable in respect of the issuance or delivery of the Right Certificates or of
any Preferred Shares upon the exercise of Rights. The Company shall not,
however, be required to pay any transfer tax which may be payable in respect of
any transfer or delivery of Right Certificates to a Person other than, or the
issuance or delivery of certificates or depositary receipts for the Preferred
Shares in a name other than that of, the registered holder of the Right
Certificate evidencing Rights surrendered for exercise or to issue or to
deliver any certificates or depositary receipts for Preferred Shares upon the
exercise of any Rights until any such tax shall have been paid (any such tax
being payable by the holder of such Right Certificate at the time of surrender)
or until it has been established to the Company’s reasonable satisfaction that
no such tax is due.

     Section 10. Preferred Shares Record Date. Each Person in whose name any
certificate for Preferred Shares is issued upon the exercise of Rights shall
for all purposes be deemed to have become the holder of record of the Preferred
Shares represented thereby on, and such certificate shall be dated, the date
upon which the Right Certificate evidencing such Rights was duly surrendered
and payment of the Purchase Price (and any applicable transfer taxes) was made;
provided, however, that, if the date of such surrender and payment is a date
upon which the Preferred Shares transfer books of the Company are closed, such
Person shall be deemed to have become the record holder of such shares on, and
such certificate shall be dated, the next succeeding Business Day on which the
Preferred Shares transfer books of the Company are open. Prior to the exercise
of the Rights evidenced thereby, the holder of a Right Certificate

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shall not be
entitled to any rights of a holder of Preferred Shares for which the Rights
shall be exercisable, including, without limitation, the right to vote, to
receive dividends or other distributions or to exercise any preemptive rights,
and shall not be entitled to receive any notice of any proceedings of the
Company, except as provided herein.

     Section 11. Adjustment of Purchase Price, Number of Shares or Number of
Rights. The Purchase Price, the number of Preferred Shares covered by each
Right and the number of Rights outstanding are subject to adjustment from time
to time as provided in this Section 11.

     (a) (i) In the event the Company shall at any time after the date of this
Agreement (A) declare a dividend on the Preferred Shares payable in Preferred
Shares, (B) subdivide the outstanding Preferred Shares, (C) combine the
outstanding Preferred Shares into a
smaller number of Preferred Shares or (D) issue any shares of its capital
stock in a reclassification of the Preferred Shares (including any such
reclassification in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation), except as otherwise
provided in this Section 11(a), the Purchase Price in effect at the time of the
record date for such dividend or of the effective date of such subdivision,
combination or reclassification, and the number and kind of shares of capital
stock issuable on such date, shall be proportionately adjusted so that the
holder of any Right exercised after such time shall be entitled to receive the
aggregate number and kind of shares of capital stock which, if such Right had
been exercised immediately prior to such date and at a time when the Preferred
Shares transfer books of the Company were open, such holder would have owned
upon such exercise and been entitled to receive by virtue of such dividend,
subdivision, combination or reclassification; provided, however, that in no
event shall the consideration to be paid upon the exercise of one Right be less

-16-

 

than the aggregate par value of the shares of capital stock of the Company
issuable upon exercise of one Right.

     (ii) Subject to Section 24 hereof, in the event that a Distribution Date
shall have occurred and any Person is, or becomes, an Acquiring Person, each
holder of a Right shall thereafter have a right to receive, upon exercise
thereof at a price equal to the then current Purchase Price multiplied by the
number of one one-hundredths of a Preferred Share for which a Right is then
exercisable, in accordance with the terms of this Agreement and in lieu of
Preferred Shares, such number of Common Shares of the Company as shall equal
the result obtained by (A) multiplying the then current Purchase Price by the
number of one one-hundredths of a Preferred Share for which a Right is then
exercisable and dividing that product by (B) 50% of the
then current per share market price of the Common Shares of the Company
(determined pursuant to Section 11(d) hereof) on the date of the occurrence of
such event. In the event that any Person shall become an Acquiring Person and
the Rights shall then be outstanding, the Company shall not take any action
which would eliminate or diminish the benefits intended to be afforded by the
Rights.

     From and after the occurrence of such event, any Rights that are or were
acquired or beneficially owned by any Acquiring Person (or any Associate or
Affiliate of such Acquiring Person) shall be void, and any holder of such
Rights shall thereafter have no right to exercise such Rights under any
provision of this Agreement. No Right Certificate shall be issued pursuant to
Section 3 hereof that represents Rights beneficially owned by an Acquiring
Person whose Rights would be void pursuant to the preceding sentence or any
Associate or Affiliate thereof; no Right Certificate shall be issued at any
time upon the transfer of any Rights to an Acquiring Person whose Rights would
be void pursuant to the preceding sentence or any Associate or Affiliate

-17-

 

thereof or to any nominee of such Acquiring Person, Associate or Affiliate; and
any Right Certificate delivered to the Rights Agent for transfer to an
Acquiring Person whose Rights would be void pursuant to the preceding sentence
shall be cancelled.

     (iii) In the event that there shall not be sufficient Common Shares
authorized but unissued to permit the exercise in full of the Rights in
accordance with subparagraph (ii) above, the Company shall take all such action
as may be necessary to authorize additional Common Shares for issuance upon
exercise of the Rights. In the event the Company shall, after good faith
effort, be unable to take all such action as may be necessary to authorize such
additional Common Shares, the Company shall substitute, for each Common Share
that would otherwise be issuable upon exercise of a Right, a number of
Preferred Shares or fraction thereof such that the
current per share market price of one Preferred Share multiplied by such
number or fraction is equal to the current per share market price of one Common
Share as of the date of issuance of such Preferred Shares or fraction thereof.

     (b) In case the Company shall fix a record date for the issuance of
rights, options or warrants to all holders of Preferred Shares entitling them
(for a period expiring within 45 calendar days after such record date) to
subscribe for or purchase Preferred Shares (or shares having the same rights,
privileges and preferences as the Preferred Shares (“equivalent preferred
shares”)) or securities convertible into Preferred Shares or equivalent
preferred shares at a price per Preferred Share or equivalent preferred share
(or having a conversion price per share, if a security convertible into
Preferred Shares or equivalent preferred shares) less than the then current per
share market price of the Preferred Shares (as defined in Section 11(d)) on
such record date, the Purchase Price to be in effect after such record date
shall be determined by multiplying the Purchase Price in effect immediately
prior to such record date by a fraction, the numerator of

-18-

 

which shall be the
number of Preferred Shares outstanding on such record date plus the number of
Preferred Shares which the aggregate offering price of the total number of
Preferred Shares and/or equivalent preferred shares so to be offered (and/or
the aggregate initial conversion price of the convertible securities so to be
offered) would purchase at such current market price and the denominator of
which shall be the number of Preferred Shares outstanding on such record date
plus the number of additional Preferred Shares and/or equivalent preferred
shares to be offered for subscription or purchase (or into which the
convertible securities so to be offered are initially convertible); provided,
however, that in no event shall the consideration to be paid upon the exercise
of one Right be less than the aggregate par value of the shares of capital
stock of the Company issuable upon exercise of one Right. In case such
subscription price may be paid in a
consideration part or all of which shall be in a form other than cash, the
value of such consideration shall be as determined in good faith by the Board
of Directors of the Company, whose determination shall be described in a
statement filed with the Rights Agent and shall be binding on the Rights Agent
and holders of the Rights. Such adjustment shall be made successively whenever
such a record date is fixed; and, in the event that such rights, options or
warrants are not so issued, the Purchase Price shall be adjusted to be the
Purchase Price which would then be in effect if such record date had not been
fixed.

     (c) In case the Company shall fix a record date for the making of a
distribution to all holders of the Preferred Shares (including any such
distribution made in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation) of evidences of
indebtedness or assets (other than a regular quarterly cash dividend or a
dividend payable in Preferred Shares) or subscription rights or warrants
(excluding those referred to in Section 11(b) hereof), the Purchase Price to be
in effect after such record date shall be deter-

-19-

 

mined by multiplying the
Purchase Price in effect immediately prior to such record date by a fraction,
the numerator of which shall be the then-current per share market price of the
Preferred Shares on such record date, less the fair market value (as determined
in good faith by the Board of Directors of the Company, whose determination
shall be described in a statement filed with the Rights Agent and shall be
binding on the Rights Agent and holders of the Rights) of the portion of the
assets or evidences of indebtedness so to be distributed or of such
subscription rights or warrants applicable to one Preferred Share and the
denominator of which shall be such then-current per share market price of the
Preferred Shares on such record date; provided, however, that in no event shall
the consideration to be paid upon the exercise of one Right be less than the
aggregate par value of the shares of capital stock of the Company to be issued
upon exercise of
one Right. Such adjustments shall be made successively whenever such a
record date is fixed; and, in the event that such distribution is not so made,
the Purchase Price shall again be adjusted to be the Purchase Price which would
then be in effect if such record date had not been fixed.

     (d) (i) For the purpose of any computation hereunder, the “current per
share market price” of any security (a “Security” for the purpose of this
Section 11(d)(i)) on any date shall be deemed to be the average of the daily
closing prices per share of such Security for the 30 consecutive Trading Days
immediately prior to such date; provided, however, that, in the event that the
current per share market price of the Security is determined during a period
following the announcement by the issuer of such Security of (A) a dividend or
distribution on such Security payable in shares of such Security or Securities
convertible into such shares, or (B) any subdivision, combination or
reclassification of such Security and prior to the expiration of 30 Trading
Days after the ex-dividend date for such dividend or distribution, or the
record date for such subdivision, combination or reclassification, then, and in
each such case, the current per share mar-

-20-

 

ket price shall be appropriately
adjusted to reflect the current market price per share equivalent of such
Security. The closing price for each day shall be the last sale price, regular
way, reported at or prior to 4:00 P.M. Eastern time or, in case no such sale
takes place on such day, the average of the bid and asked prices, regular way,
reported as of 4:00 P.M. Eastern time, in either case, as reported in the
principal consolidated transaction reporting system with respect to securities
listed or admitted to trading on the American Stock Exchange or, if the
Security is not listed or admitted to trading on the American Stock Exchange,
as reported in the principal consolidated transaction reporting system with
respect to securities listed on the principal national securities exchange on
which the Security is listed or admitted to trading or, if the Security is not
listed or admitted to trading on any national securities exchange, the last
quoted price reported at or prior
to 4:00 P.M. Eastern time or, if not so quoted, the average of the high
bid and low asked prices in the over-the-counter market, as reported as of 4:00
P.M. Eastern time by NASDAQ or such other system then in use, or, if on any
such date the Security is not quoted by any such organization, the average of
the closing bid and asked prices as furnished by a professional market maker
making a market in the Security selected by the Board of Directors of the
Company. The term “Trading Day” shall mean a day on which the principal
national securities exchange on which the Security is listed or admitted to
trading is open for the transaction of business, or, if the Security is not
listed or admitted to trading on any national securities exchange, a Business
Day.

     (ii) For the purpose of any computation hereunder, the “current per share
market price” of the Preferred Shares shall be determined in accordance with
the method set forth in Section 11(d)(i). If the Preferred Shares are not
publicly traded, the “current per share market price” of the Preferred Shares
shall be conclusively deemed to be the current per share market price of the
Common Shares as determined pursuant to Section 11(d)(i) hereof (appropri-

-21-

 

ately
adjusted to reflect any stock split, stock dividend or similar transaction
occurring after the date hereof), multiplied by one hundred. If neither the
Common Shares nor the Preferred Shares are publicly held or so listed or
traded, “current per share market price” shall mean the fair value per share as
determined in good faith by the Board of Directors of the Company, whose
determination shall be described in a statement filed with the Rights Agent.

     (e) No adjustment in the Purchase Price shall be required unless such
adjustment would require an increase or decrease of at least 1% in the Purchase
Price; provided, however, that any adjustments which by reason of this Section
11(e) are not required to be made shall be carried forward and taken into
account in any subsequent adjustment. All calculations under
this Section 11 shall be made to the nearest cent or to the nearest one
hundred-millionth of a Preferred Share or one ten-thousandth of any other share
or security as the case may be. Notwithstanding the first sentence of this
Section 11(e), any adjustment required by this Section 11 shall be made no
later than the earlier of (i) three years from the date of the transaction
which requires such adjustment or (ii) the date of the expiration of the right
to exercise any Rights.

     (f) If, as a result of an adjustment made pursuant to Section 11(a)
hereof, the holder of any Right thereafter exercised shall become entitled to
receive any shares of capital stock of the Company other than Preferred
Shares, thereafter the number of such other shares so receivable upon exercise
of any Right shall be subject to adjustment from time to time in a manner and
on terms as nearly equivalent as practicable to the provisions with respect to
the Preferred Shares contained in Section 11(a) through (c) hereof, inclusive,
and the provisions of Sections 7, 9, 10, 13 and 14 hereof with respect to the
Preferred Shares shall apply on like terms to any such other shares.

-22-

 

     (g) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of one one-hundredths of a
Preferred Share purchasable from time to time hereunder upon exercise of the
Rights, all subject to further adjustment as provided herein.

     (h) Unless the Company shall have exercised its election as provided in
Section 11(i) hereof, upon each adjustment of the Purchase Price as a result of
the calculations made in Sections 11(b) and (c) hereof, each Right outstanding
immediately prior to the making of such adjustment shall thereafter evidence
the right to purchase, at the adjusted Purchase Price, that number of one
one-hundredths of a Preferred Share (calculated to the nearest one hundred-millionth of a Preferred Share) obtained by (A) multiplying (x) the
number of one one-hundredth of a share covered by a Right immediately prior to
this adjustment by (y) the Purchase Price in effect immediately prior to such
adjustment of the Purchase Price and (B) dividing the product so obtained by
the Purchase Price in effect immediately after such adjustment of the Purchase
Price.

     (i) The Company may elect, on or after the date of any adjustment of the
Purchase Price, to adjust the number of Rights in substitution for any
adjustment in the number of one one-hundredths of a Preferred Share purchasable
upon the exercise of a Right. Each of the Rights outstanding after such
adjustment of the number of Rights shall be exercisable for the number of one
one-hundredths of a Preferred Share for which a Right was exercisable
immediately prior to such adjustment. Each Right held of record prior to such
adjustment of the number of Rights shall become that number of Rights
(calculated to the nearest one ten-thousandth) obtained by dividing the
Purchase Price in effect immediately prior to adjustment of the Purchase Price
by the Purchase Price in effect immediately after adjustment of the Purchase
Price. The

-23-

 

Company shall make a public announcement of its election to adjust
the number of Rights, indicating the record date for the adjustment, and, if
known at the time, the amount of the adjustment to be made. This record date
may be the date on which the Purchase Price is adjusted or any day thereafter,
but, if the Right Certificates have been issued, shall be at least 10 days
later than the date of the public announcement. If Right Certificates have
been issued, upon each adjustment of the number of Rights pursuant to this
Section 11(i), the Company shall, as promptly as practicable, cause to be
distributed to holders of record of Right Certificates on such record date
Right Certificates evidencing, subject to Section 14 hereof, the additional
Rights to which such holders shall be entitled as a result of such adjustment,
or, at the option of the Company, shall cause to be distributed to such holders of record in substitution and replacement for
the Right Certificates held by such holders prior to the date of adjustment,
and upon surrender thereof, if required by the Company, new Right Certificates
evidencing all the Rights to which such holders shall be entitled after such
adjustment. Right Certificates so to be distributed shall be issued, executed
and countersigned in the manner provided for herein, and shall be registered in
the names of the holders of record of Right Certificates on the record date
specified in the public announcement.

     (j) Irrespective of any adjustment or change in the Purchase Price or in
the number of one one-hundredths of a Preferred Share issuable upon the
exercise of the Rights, the Right Certificates theretofore and thereafter
issued may continue to express the Purchase Price and the number of one
one-hundredths of a Preferred Share which were expressed in the initial Right
Certificates issued hereunder.

     (k) Before taking any action that would cause an adjustment reducing the
Purchase Price below one one-hundredth of the then par value, if any, of the
Preferred Shares issuable upon exercise of the Rights, the Company shall take
any corporate action which may, in the

-24-

 

opinion of its counsel, be necessary in
order that the Company may validly and legally issue fully paid and
nonassessable Preferred Shares at such adjusted Purchase Price.

     (l) In any case in which this Section 11 shall require that an adjustment
in the Purchase Price be made effective as of a record date for a specified
event, the Company may elect to defer until the occurrence of such event the
issuing to the holder of any Right exercised after such record date of the
Preferred Shares and other capital stock or securities of the Company, if any,
issuable upon such exercise over and above the Preferred Shares and other
capital stock or securities of the Company, if any, issuable upon such exercise
on the basis of the Pur
chase Price in effect prior to such adjustment; provided, however, that
the Company shall deliver to such holder a due bill or other appropriate
instrument evidencing such holder’s right to receive such additional shares
upon the occurrence of the event requiring such adjustment.

     (m) Anything in this Section 11 to the contrary notwithstanding, the
Company shall be entitled to make such reductions in the Purchase Price, in
addition to those adjustments expressly required by this Section 11, as and to
the extent that it, in its sole discretion, shall determine to be advisable in
order that any consolidation or subdivision of the Preferred Shares, issuance
wholly for cash of any Preferred Shares at less than the current market price,
issuance wholly for cash of Preferred Shares or securities which by their terms
are convertible into or exchangeable for Preferred Shares, dividends on
Preferred Shares payable in Preferred Shares or issuance of rights, options or
warrants referred to in Section 11(b) hereof, hereafter made by the Company to
holders of the Preferred Shares shall not be taxable to such shareholders.

     (n) In the event that, at any time after the date of this Agreement and
prior to the Distribution Date, the Company shall (i) declare or pay any
dividend on the Common Shares

-25-

 

payable in Common Shares, or (ii) effect a
subdivision, combination or consolidation of the Common Shares (by
reclassification or otherwise than by payment of dividends in Common Shares)
into a greater or lesser number of Common Shares, then, in any such case, (A)
the number of one one-hundredths of a Preferred Share purchasable after such
event upon proper exercise of each Right shall be determined by multiplying the
number of one one-hundredths of a Preferred Share so purchasable immediately
prior to such event by a fraction, the numerator of which is the number of
Common Shares outstanding immediately before such event and the denominator of
which is the number of Common Shares outstanding immediately after such event,
and (B) each Common Share outstanding immediately after such event shall have
issued with
respect to it that number of Rights which each Common Share outstanding
immediately prior to such event had issued with respect to it. The adjustments
provided for in this Section 11(n) shall be made successively whenever such a
dividend is declared or paid or such a subdivision, combination or
consolidation is effected.

     Section 12. Certificate of Adjusted Purchase Price or Number of Shares.
Whenever an adjustment is made as provided in Section 11 or 13 hereof, the
Company shall promptly (a) prepare a certificate setting forth such adjustment
and a brief statement of the facts accounting for such adjustment, (b) file
with the Rights Agent and with each transfer agent for the Common Shares or the
Preferred Shares and the Securities and Exchange Commission a copy of such
certificate and (c) if such adjustment occurs at any time after the
Distribution Date, mail a brief summary thereof to each holder of a Right
Certificate in accordance with Section 25 hereof.

     Section 13. Consolidation, Merger, Statutory Share Exchange or Sale or
Transfer of Assets or Earning Power. In the event, directly or indirectly, at
any time after a Dis-

-26-

 

tribution Date shall have occurred and a Person or group
is, or becomes, an Acquiring Person, (a) the Company shall consolidate with, or
merge with and into, any other Person, (b) any Person shall consolidate with
the Company, or merge with and into the Company and the Company shall be the
continuing or surviving corporation of such merger and, in connection with such
merger, all or part of the Common Shares shall be changed into or exchanged for
stock or other securities of any other Person (or the Company) or cash or any
other property, (c) the Company shall effect a statutory share exchange with
the outstanding Common Shares of the Company being exchanged for stock or other
securities of any other Person, money or other property or (d) the Company
shall sell or otherwise transfer (or one or more of its Subsidiaries shall sell
or otherwise transfer), in one or more transactions, assets or earning power
aggregating 50% or more of the assets or earning power of the Company and its
Subsidiaries (taken as a whole) to any other Person other than the Company or
one or more of its wholly-owned Subsidiaries, then, and in each such case,
proper provision shall be made so that (i) each holder of a Right (except as
otherwise provided herein) shall thereafter have the right to receive, upon the
exercise thereof at a price equal to the then current Purchase Price multiplied
by the number of one one-hundredths of a Preferred Share for which a Right is
then exercisable, in accordance with the terms of this Agreement and in lieu of
Preferred Shares, such number of Common Shares of such other Person (including
the Company as successor thereto or as the surviving corporation) as shall
equal the result obtained by (A) multiplying the then current Purchase Price by
the number of one one-hundredths of a Preferred Share for which a Right is then
exercisable and dividing that product by (B) 50% of the then current per share
market price of the Common Shares of such other Person (determined pursuant to
Section 11(d) hereof) on the date of consummation of such consolidation,
merger, share exchange, sale or transfer; (ii) the issuer of such Common Shares
shall

-27-

 

thereafter be liable for, and shall assume, by virtue of such
consolidation, merger, share exchange, sale or transfer, all the obligations
and duties of the Company pursuant to this Agreement; (iii) the term “Company”
shall thereafter be deemed to refer to such issuer; and (iv) such issuer shall
take such steps (including, but not limited to, the reservation of a sufficient
number of its Common Shares in accordance with Section 9 hereof) in connection
with such consummation as may be necessary to assure that the provisions hereof
shall thereafter be applicable, as nearly as reasonably may be, in relation to
the Common Shares
of the Company thereafter deliverable upon the exercise of the Rights.
The Company shall not consummate any such consolidation, merger, share
exchange, sale or transfer unless, prior thereto, the Company and such issuer
shall have executed and delivered to the Rights Agent a supplemental agreement
so providing.

     Section 14. The Company shall not enter into any transaction of the kind
referred to in this Section 13 if at the time of such transaction there are any
rights, warrants, instruments or securities outstanding or any agreements or
arrangements which, as a result of the consummation of such transaction, would
eliminate or substantially diminish the benefits intended to be afforded by the
Rights.

     Section 15. Notwithstanding anything herein to the contrary, this Section
13 shall not be applicable to a transaction described in clauses (a), (b) or
(c) hereof if (1) such transaction is consummated with a Person or Persons who
acquired Common Shares pursuant to a Permitted Offer (or a wholly owned
subsidiary of any such Person or Persons), (2) the price per Common Share
offered in such transaction is not less then the price per Common share paid to
all holders of Common Shares pursuant to such tender offer or exchange offer,
and (3) the form of consideration being offered to the remaining holders of
Common Shares pursuant

-28-

 

to such transaction is the same as the form of
consideration paid pursuant to such tender offer or exchange offer. Upon
consummation of any such transaction, all Rights hereunder shall expire.

     Section 16. The provisions of this Section 13 shall similarly apply to
successive mergers or consolidations or sales or other transfers.

     Section 17. Fractional Rights and Fractional Shares. (a) The Company
shall not be required to
issue fractions of Rights or to distribute Right Certificates which
evidence fractional Rights. In lieu of such fractional Rights, there shall be
paid to the registered holders of the Right Certificates with regard to which
such fractional Rights would otherwise be issuable, an amount in cash equal to
the same fraction of the current market value of a whole Right. For the
purposes of this Section 14(a), the current market value of a whole Right shall
be the closing price of the Rights for the Trading Day immediately prior to the
date on which such fractional Rights would have been otherwise issuable. The
closing price for any day shall be the last sale price, regular way, reported
at or prior to 4:00 P.M. Eastern time or, in case no such sale takes place on
such day, the average of the closing bid and asked prices, regular way, as of
4:00 P.M. Eastern time in either case, as reported in the principal
consolidated transaction reporting system with respect to securities listed or
admitted to trading on the American Stock Exchange or, if the Rights are not
listed or admitted to trading on the American Stock Exchange, as reported in
the principal consolidated transaction reporting system with respect to
securities listed on the principal national securities exchange on which the
Rights are listed or admitted to trading or, if the Rights are not listed or
admitted to trading on any national securities exchange, the last quoted price
or, if not so quoted, the average of the high bid and low asked prices in the
over-the-counter market, as reported as of 4:00 P.M. Eastern time by NASDAQ or
such other system then in use or, if on any such date the Rights are not quoted
by any such organization, the

-29-

 

average of the closing bid and asked prices as
furnished by a professional market maker making a market in the Rights selected
by the Board of Directors of the Company. If on any such date no such market
maker is making a market in the Rights, the fair value of the Rights on such
date as determined in good faith by the Board of Directors of the Company shall
be used.

     (b) The Company shall not be required to issue fractions of Preferred
Shares (other than fractions which are integral multiples of one one-hundredth
of a Preferred Share) upon exercise of the Rights or to distribute certificates
which evidence fractional Preferred Shares (other than fractions which are
integral multiples of one one-hundredth of a Preferred Share). Fractions of
Preferred Shares in integral multiples of one one-hundredth of a Preferred
Share may, at the election of the Company, be evidenced by depositary receipts,
pursuant to an appropriate agreement between the Company and a depositary
selected by it; provided that such agreement shall provide that the holders of
such depositary receipts shall have all the rights, privileges and preferences
to which they are entitled as beneficial owners of the Preferred Shares
represented by such depositary receipts. In lieu of fractional Preferred
Shares that are not integral multiples of one one-hundredth of a Preferred
Share, the Company shall pay to the registered holders of Right Certificates at
the time such Rights are exercised as herein provided an amount in cash equal
to the same fraction of the current market value of one Preferred Share. For
the purposes of this Section 14(b), the current market value of a Preferred
Share shall be the closing price of a Preferred Share (as determined pursuant
to the second sentence of Section 11(d)(i) hereof) for the Trading Day
immediately prior to the date of such exercise.

     (c) The holder of a Right, by the acceptance of the Right, expressly
waives such holder’s right to receive any fractional Rights or any fractional
shares upon exercise of a Right (except as provided above).

-30-

 

     Section 18. Rights of Action. All rights of action in respect of this
Agreement, excepting the rights of action given to the Rights Agent under
Section 18 hereof, are vested in the respective registered holders of the Right
Certificates (and, prior to the Distribution Date, the registered holders of
the Common
Shares); and any registered holder of any Right Certificate (or, prior to
the Distribution Date, of the Common Shares), without the consent of the Rights
Agent or of the holder of any other Right Certificate (or, prior to the
Distribution Date, of the Common Shares), may, in such holder’s own behalf and
for such holder’s own benefit, enforce, and may institute and maintain any
suit, action or proceeding against the Company to enforce, or otherwise act in
respect of, such holder’s right to exercise the Rights evidenced by such Right
Certificate in the manner provided in such Right Certificate and in this
Agreement. Without limiting the foregoing or any remedies available to the
holders of Rights, it is specifically acknowledged that the holders of Rights
would not have an adequate remedy at law for any breach of this Agreement, and
will be entitled to specific performance of the obligations under, and
injunctive relief against actual or threatened violations of the obligations of
any Person subject to, this Agreement.

     Section 19. Agreement of Right Holders. Every holder of a Right, by
accepting the same, consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:

     (a) prior to the Distribution Date, the Rights will be transferable only
in connection with the transfer of the Common Shares;

-31-

 

     (b) after the Distribution Date, the Right Certificates are transferable
only on the registry books of the Rights Agent if surrendered at the principal
office of the Rights Agent, duly endorsed or accompanied by a proper
instrument of transfer; and

     (c) the Company and the Rights Agent may deem and treat the person in
whose name the Right Certificate (or, prior to the Distribution Date, the
associated Common Shares certificate) is registered as the absolute owner
thereof and of the Rights evidenced thereby
(notwithstanding any notations of ownership or writing on the Right
Certificate or the associated Common Shares certificate made by anyone other
than the Company or the Rights Agent) for all purposes whatsoever, and neither
the Company nor the Rights Agent shall be affected by any notice to the
contrary.

     Section 20. Right Certificate Holder Not Deemed a Shareholder. No holder,
as such, of any Right Certificate shall be entitled to vote, receive dividends
or be deemed for any purpose the holder of the Preferred Shares or any other
securities of the Company which may at any time be issuable on the exercise of
the Rights represented thereby, nor shall anything contained herein or in any
Right Certificate be construed to confer upon the holder of any Right
Certificate, as such, any of the rights of a shareholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
shareholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
shareholders (except as provided in Section 25 hereof), or to receive dividends
or subscription rights, or otherwise, until the Right or Rights evidenced by
such Right Certificate shall have been exercised in accordance with the
provisions hereof.

-32-

 

     Section 21. Concerning the Rights Agent. The Company agrees to pay to the
Rights Agent reasonable compensation for all services rendered by it hereunder,
and, from time to time, on demand of the Rights Agent, its reasonable expenses
and outside counsel fees and other disbursements incurred in the administration
and execution of this Agreement and the exercise and performance of its duties
hereunder. The Company also agrees to indemnify the Rights Agent for, and to
hold it harmless against, any loss, liability, or expense incurred without
negligence, bad faith or willful misconduct on the part of the Rights Agent, for anything done or
omitted by the Rights Agent in connection with the acceptance and
administration of this Agreement, including the costs and expenses of defending
against any claim of liability in the premises.

     The Rights Agent shall be protected and shall incur no liability for, or
in respect of any action taken, suffered or omitted by it in connection with,
its administration of this Agreement in reliance upon any Right Certificate or
certificate for the Preferred Shares or Common Shares or for other securities
of the Company, instrument of assignment or transfer, power of attorney,
endorsement, affidavit, letter, notice, direction, consent, certificate,
statement, or other paper or document believed by it to be genuine and to be
signed, executed and, where necessary, verified or acknowledged, by the proper
person or persons, or otherwise upon the advice of counsel as set forth in
Section 20 hereof.

     Section 22. Merger or Consolidation or Change of Name of Rights Agent.
Any corporation into which the Rights Agent or any successor Rights Agent may
be merged or with which it may be consolidated, or any corporation resulting
from any merger or consolidation to which the Rights Agent or any successor
Rights Agent shall be a party, or any corporation succeeding to the stock
transfer or corporate trust powers of the Rights Agent or any successor

-33-

 

Rights
Agent, shall be the successor to the Rights Agent under this Agreement without
the execution or filing of any paper or any further act on the part of any of
the parties hereto; provided that such corporation would be eligible for
appointment as a successor Rights Agent under the provisions of Section 21
hereof. In case at the time such successor Rights Agent shall succeed to the
agency created by this Agreement, any of the Right Certificates shall have been
countersigned but not delivered, any such successor Rights Agent may adopt the
countersignature of the
predecessor Rights Agent and deliver such Right Certificates so
countersigned; and, in case at that time any of the Right Certificates shall
not have been countersigned, any successor Rights Agent may countersign such
Right Certificates either in the name of the predecessor Rights Agent or in the
name of the successor Rights Agent; and, in all such cases, such Right
Certificates shall have the full force provided in the Right Certificates and
in this Agreement.

     In case at any time the name of the Rights Agent shall be changed and at
such time any of the Right Certificates shall have been countersigned but not
delivered, the Rights Agent may adopt the countersignature under its prior name
and deliver Right Certificates so countersigned; and, in case at that time any
of the Right Certificates shall not have been countersigned, the Rights Agent
may countersign such Right Certificates either in its prior name or in its
changed name; and, in all such cases, such Right Certificates shall have the
full force provided in the Right Certificates and in this Agreement.

     Section 23. Duties of Rights Agent. The Rights Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Right Certificates,
by their acceptance thereof, shall be bound:

-34-

 

     (a) The Rights Agent may consult with legal counsel (who may be legal
counsel for the Company), and the opinion of such counsel shall be full and
complete authorization and protection to the Rights Agent as to any action
taken or omitted by it in good faith and in accordance with such opinion.

     (b) Whenever in the performance of its duties under this Agreement the
Rights Agent shall deem it necessary or desirable that any fact or matter be
proved or established by the Company prior to taking or suffering any action hereunder, such
fact or matter (unless other evidence in respect thereof be herein specifically
prescribed) may be deemed to be conclusively proved and established by a
certificate signed by any one of the Chairman of the Board, the Chief Executive
Officer, the President, any Vice President, the Treasurer or the Secretary of
the Company and delivered to the Rights Agent; and such certificate shall be
full authorization to the Rights Agent for any action taken or suffered in good
faith by it under the provisions of this Agreement in reliance upon such
certificate.

     (c) The Rights Agent shall be liable hereunder to the Company and any
other Person only for its own negligence, bad faith or willful misconduct.

     (d) The Rights Agent shall not be liable for or by reason of any of the
statements of fact or recitals contained in this Agreement or in the Right
Certificates (except its countersignature thereof) or be required to verify the
same, but all such statements and recitals are and shall be deemed to have been
made by the Company only.

     (e) The Rights Agent shall not be under any responsibility in respect of
the validity of this Agreement or the execution and delivery hereof (except the
due execution hereof by the Rights Agent) or in respect of the validity or
execution of any Right Certificate (except its

-35-

 

countersignature thereof); nor
shall it be responsible for any breach by the Company of any covenant or
condition contained in this Agreement or in any Right Certificate; nor shall it
be responsible for any change in the exercisability of the Rights (including
the Rights becoming void pursuant to Section 11(a)(ii) hereof) or any
adjustment in the terms of the Rights (including the manner, method or amount
thereof) provided for in Section 3, 11, 13, 23 or 24 hereof, or the
ascertaining of the existence of facts that would require any such change or
adjustment (except with respect to the exercise of Rights evidenced by Right Certificates
after actual notice that such change or adjustment is required); nor shall it
by any act hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any Preferred Shares to be issued pursuant to
this Agreement or any Right Certificate or as to whether any Preferred Shares
will, when issued, be validly authorized and issued, fully paid and
nonassessable.

     (f) The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and other acts, instruments and assurances as may reasonably be
required by the Rights Agent for the carrying out or performing by the Rights
Agent of the provisions of this Agreement.

     (g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from any
one of the Chairman of the Board, the Chief Executive Officer, the President,
any Vice President, the Secretary or the Treasurer of the Company, and to apply
to such officers for advice or instructions in connection with its duties, and
it shall not be liable for any action taken or suffered by it in good faith in
accordance with instructions of any such officer or for any delay in acting
while waiting for those instructions.

-36-

 

     (h) The Rights Agent and any shareholder, director, officer or employee of
the Rights Agent may buy, sell or deal in any of the Rights or other securities
of the Company or become pecuniarily interested in any transaction in which the
Company may be interested, or contract with or lend money to the Company or
otherwise act as fully and freely as though it were not Rights Agent under this
Agreement. Nothing herein shall preclude the Rights Agent from acting in any
other capacity for the Company or for any other legal entity.

     (i) The Rights Agent may execute and exercise any of the rights or powers
hereby vested in it or perform any duty hereunder either itself or by or
through its attorneys or agents, and the Rights Agent shall not be answerable
or accountable for any act, default, neglect or misconduct of any such
attorneys or agents or for any loss to the Company resulting from any such act,
default, neglect or misconduct, provided that reasonable care was exercised in
the selection and continued employment thereof.

     Section 24. Change of Rights Agent. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon 30 days’ notice in writing mailed to the Company and to each transfer
agent of the Common Shares or Preferred Shares by registered or certified mail,
and to the holders of the Right Certificates by first-class mail. The Company
may remove the Rights Agent or any successor Rights Agent upon 30 days’ notice
in writing, mailed to the Rights Agent or successor Rights Agent, as the case
may be, and to each transfer agent of the Common Shares or Preferred Shares by
registered or certified mail, and to the holders of the Right Certificates by
first-class mail. If the Rights Agent shall resign or be removed or shall
otherwise become incapable of acting, the Company shall appoint a successor to
the Rights Agent. If the Company shall fail to make such appointment within a
period of 30 days after giving notice of such removal or after it has been
notified

-37-

 

in writing of such resignation or incapacity by the resigning or
incapacitated Rights Agent or by the holder of a Right Certificate (which
holder shall, with such notice, submit such holder’s Right Certificate for
inspection by the Company), then the registered holder of any Right Certificate
may apply to any court of competent jurisdiction for the appointment of a new
Rights Agent. Any successor Rights Agent, whether appointed by the Company or
by such a court, shall be (a) a corporation organized and doing business under the laws of the United States or of the State of Minnesota (or of any
other state of the United States so long as such corporation is authorized to
do business as a banking institution in the State of Minnesota), in good
standing, having an office in the State of Minnesota, which is authorized under
such laws to exercise corporate trust or stock transfer powers and is subject
to supervision or examination by federal or state authority and which has at
the time of its appointment as Rights Agent a combined capital and surplus of
at least $50 million or (b) an affiliate of a corporation described in clause
(a) of this sentence. After appointment, the successor Rights Agent shall be
vested with the same powers, rights, duties and responsibilities as if it had
been originally named as Rights Agent without further act or deed; but the
predecessor Rights Agent shall deliver and transfer to the successor Rights
Agent any property at the time held by it hereunder, and execute and deliver
any further assurance, conveyance, act or deed necessary for the purpose. Not
later than the effective date of any such appointment, the Company shall file
notice thereof in writing with the predecessor Rights Agent and each transfer
agent of the Common Shares or Preferred Shares, and mail a notice thereof in
writing to the registered holders of the Right Certificates. Failure to give
any notice provided for in this Section 21, however, or any defect therein,
shall not affect the legality or validity of the resignation or removal of the
Rights Agent or the appointment of the successor Rights Agent, as the case may
be.

-38-

 

     Section 25. Issuance of New Right Certificates. Notwithstanding any of
the provisions of this Agreement or of the Rights to the contrary, the Company
may, at its option, issue new Right Certificates evidencing Rights in such form
as may be approved by the Board of Directors of the Company to reflect any
adjustment or change in the Purchase Price and the number or kind or class of
shares or other securities or property purchasable under the Right Certificates
made in accordance with the provisions of this Agreement.

     Section 26. Redemption. (a) The Board of Directors of the Company may,
at its option, at any time prior to the Close of Business on the earlier of (i)
the Distribution Date (subject to amendment or extension by the Company as
provided in Section 27 hereof) or (ii) the Final Expiration Date, redeem all
but not less than all the then outstanding Rights at a redemption price of
$.001 per Right, appropriately adjusted to reflect any stock split, stock
dividend or similar transaction occurring after the date hereof (such
redemption price being hereinafter referred to as the “Redemption Price”). The
redemption of the Rights by the Board of Directors of the Company may be made
effective at such time, on such basis and with such conditions as the Board of
Directors of the Company, in its sole discretion, may establish.

     (b) Immediately upon the action of the Board of Directors of the Company
ordering the redemption of the Rights pursuant to paragraph (a) of this Section
23, and without any further action and without any notice, the right to
exercise the Rights will terminate and the only right thereafter of the holders
of Rights shall be to receive the Redemption Price. The Company shall promptly
give public notice of any such redemption; provided, however, that the failure
to give, or any defect in, any such notice shall not affect the validity of
such redemption. Within 10 days after such action of the Board of Directors of
the Company ordering the redemption of the Rights, the Company shall mail a
notice of redemption to all the holders of the then

-39-

 

outstanding Rights at their last addresses as they appear upon the
registry books of the Rights Agent or, prior to the Distribution Date, on the
registry books of the transfer agent for the Common Shares. Any notice which
is mailed in the manner herein provided shall be deemed given, whether or not
the holder receives the notice. Each such notice of redemption will state the
method by which the payment of the Redemption Price will be made. Neither the
Company nor any of its Affiliates or Associates may redeem, acquire or purchase
for value any Rights at any time in any manner other than that specifically set
forth in this Section 23 or in Section 24 hereof, and other than in connection
with the purchase of Common Shares prior to the Distribution Date.

     Section 27. Exchange. (a) The Board of Directors of the Company may, at
its option, at any time after the Distribution Date, exchange all or part of
the then outstanding and exercisable Rights (which shall not include Rights
that have become void pursuant to the provisions of Section 11(a)(ii) hereof)
for Common Shares at an exchange ratio of one Common Share per Right,
appropriately adjusted to reflect any adjustment in the number of Rights
pursuant to Section 11(i) (such exchange ratio being hereinafter referred to as
the “Exchange Ratio”). Notwithstanding the foregoing, the Board of Directors
of the Company shall not be empowered to effect such exchange at any time after
any Person (other than the Company, any Subsidiary of the Company, any employee
benefit plan of the Company or any such Subsidiary, or any entity holding
Common Shares for or pursuant to the terms of any such plan), together with all
Affiliates and Associates of such Person, becomes the Beneficial Owner of 50%
or more of the Common Shares then outstanding.

     (b) Immediately upon the action of the Board of Directors of the Company
ordering the exchange of any Rights pursuant to paragraph (a) of this Section
24 and without any

-40-

 

further action and without any notice, the right to exercise such Rights
shall terminate and the only right thereafter of a holder of such Rights shall
be to receive that number of Common Shares equal to the number of such Rights
held by such holder multiplied by the Exchange Ratio. The Company shall
promptly give public notice of any such exchange; provided, however, that the
failure to give, or any defect in, such notice shall not affect the validity of
such exchange. The Company promptly shall mail a notice of any such exchange
to all of the holders of such Rights at their last addresses as they appear
upon the registry books of the Rights Agent. Any notice which is mailed in the
manner herein provided shall be deemed given, whether or not the holder
receives the notice. Each such notice of exchange will state the method by
which the exchange of the Common Shares for Rights will be effected, and, in
the event of any partial exchange, the number of Rights which will be
exchanged. Any partial exchange shall be effected pro rata based on the number
of Rights (other than Rights which have become void pursuant to the provisions
of Section 11(a)(ii) hereof) held by each holder of Rights.

     (c) In the event that there shall not be sufficient Common Shares or
authorized but unissued to permit any exchange of Rights as contemplated in
accordance with this Section 24, the Company shall take all such action as may
be necessary to authorize additional Common Shares for issuance upon exchange
of the Rights. In the event the Company shall, after good faith effort, be
unable to take all such action as may be necessary to authorize such additional
Common Shares, the Company shall substitute, for each Common Share that would
otherwise be issuable upon exchange of a Right, a number of Preferred Shares or
fraction thereof such that the current per share market price of one Preferred
Share multiplied by such number or fraction is equal to the current per share
market price of one Common Share as of the date of issuance of such Preferred
Shares or fraction thereof.

-41-

 

     (d) The Company shall not be required to issue fractions of Common Shares
or to distribute certificates which evidence fractional Common Shares. In lieu
of such fractional Common Shares, the Company shall pay to the registered
holders of the Right Certificates with regard to which such fractional Common
Shares would otherwise be issuable an amount in cash equal to the same fraction
of the current market value of a whole Common Share. For the purposes of this
paragraph (d), the current market value of a whole Common Share shall be the
closing price of a Common Share (as determined pursuant to the second sentence
of Section 11(d)(i) hereof) for the Trading Day immediately prior to the date
of exchange pursuant to this Section 24.

     Section 28. Notice of Certain Events. (a) In case the Company shall, at
any time after the Distribution Date, propose (i) to pay any dividend payable
in stock of any class to the holders of the Preferred Shares or to make any
other distribution to the holders of the Preferred Shares (other than a regular
quarterly cash dividend), (ii) to offer to the holders of the Preferred Shares
rights or warrants to subscribe for or to purchase any additional Preferred
Shares or shares of stock of any class or any other securities, rights or
options, (iii) to effect any reclassification of the Preferred Shares (other
than a reclassification involving only the subdivision of outstanding Preferred
Shares), (iv) to effect any consolidation, merger or share exchange into or
with, or to effect any sale or other transfer (or to permit one or more of its
Subsidiaries to effect any sale or other transfer), in one or more
transactions, of 50% or more of the assets or earning power of the Company and
its Subsidiaries (taken as a whole) to, any other Person, (v) to effect the
liquidation, dissolution or winding up of the Company, or (vi) to declare or
pay any dividend on the Common Shares payable in Common Shares or to effect a
subdivision, combination or consolidation of the Common Shares (by
reclassification or otherwise than by payment of dividends

-42-

 

in Common Shares), then, in each such case, the Company shall give
to each holder of a Right Certificate, in accordance with Section 26 hereof, a
notice of such proposed action, which shall specify the record date for the
purposes of such stock dividend, or distribution of rights or warrants, or the
date on which such reclassification, consolidation, merger, share exchange,
sale, transfer, liquidation, dissolution, or winding up is to take place and
the date of participation therein by the holders of the Common Shares and/or
Preferred Shares, if any such date is to be fixed, and such notice shall be so
given in the case of any action covered by clause (i) or (ii) above at least 10
days prior to the record date for determining holders of the Preferred Shares
for purposes of such action, and, in the case of any such other action, at
least 10 days prior to the date of the taking of such proposed action or the
date of participation therein by the holders of the Common Shares and/or
Preferred Shares, whichever shall be the earlier.

     (b) In case the event set forth in Section 11(a)(ii) hereof shall occur,
then the Company shall, as soon as practicable thereafter, give to each holder
of a Right Certificate, in accordance with Section 26 hereof, a notice of the
occurrence of such event, which notice shall describe such event and the
consequences of such event to holders of Rights under Section 11(a)(ii) hereof.

     Section 29. Notices. Notices or demands authorized by this Agreement to
be given or made by the Rights Agent or by the holder of any Right Certificate
to or on the Company shall be sufficiently given or made if sent by first-class
mail, postage prepaid, addressed (until another address is filed in writing
with the Rights Agent) as follows:

-43-

 

Winland Electronics, Inc.

1950 Excel Drive

Mankato, MN 56001

Attention: Corporate Secretary

Subject to the provisions of Section 21 hereof, any notice or demand authorized
by this Agreement to be given or made by the Company or by the holder of any
Right Certificate to or on the Rights Agent shall be sufficiently given or made
if sent by first-class mail, postage prepaid, addressed (until another address
is filed in writing with the Company) as follows:

     Wells Fargo Bank Minnesota, N.A.

     c/o Wells Fargo Shareowner Services

     161 North Concord Exchange

     South St. Paul, MN 55075-1139

Attention: Winland Electronics Account Manager

Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Right Certificate shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the registry
books of the Company.

     Section 30. Supplements and Amendments. The Company may from time to time
supplement or amend this Agreement without the approval of any holders of Right
Certificates in order to cure any ambiguity, to correct or supplement any
provision contained herein which may be defective or inconsistent with any
other provisions herein, or to make any other

-44-

 

provisions with respect to the Rights which the Company may deem necessary
or desirable, any such supplement or amendment to be evidenced by a writing
signed by the Company and the Rights Agent; provided, however, that, from and
after the Distribution Date, this Agreement shall not be amended in any manner
which would adversely affect the interests of the holders of Rights. Without
limiting the foregoing, the Company may at any time prior to such time as any
Person becomes an Acquiring Person amend this Agreement to lower the thresholds
set forth in Section 1(a) and 3(a) hereof to not less than 10% (the “Reduced
Threshold”); provided, however, that no Person who beneficially owns a number
of Common Shares equal to or greater than the Reduced Threshold shall become an
Acquiring Person unless such Person shall, after the public announcement of the
Reduced Threshold, increase its beneficial ownership of the then outstanding
Common Shares (other than as a result of an acquisition of Common Shares by the
Company) to an amount equal to or greater than the greater of (x) the Reduced
Threshold or (y) the sum of (i) the lowest beneficial ownership of such Person
as a percentage of the outstanding Common Shares as of any date on or after the
date of the public announcement of such Reduced Threshold plus (ii) .001%.

     Section 31. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.

     Section 32. Benefits of this Agreement. (a) Nothing in this Agreement
shall be construed to give to any Person other than the Company, the Rights
Agent and the registered holders of the Right Certificates (and, prior to the
Distribution Date, the Common Shares) any legal or equitable right, remedy or
claim under this Agreement; but this Agreement shall be for

-45-

 

the sole and exclusive benefit of the Company, the Rights Agent and the
registered holders of the Right Certificates (and, prior to the Distribution
Date, the Common Shares).

     (b) The Board of Directors of the Company shall have the exclusive power
and total and complete authority to administer this Agreement and to exercise
all rights and powers specifically granted to the Board of Directors or the
Company or necessary or advisable in the administration of this Agreement,
including without limitation the right and power to interpret this Agreement
and to make conclusively all determinations deemed necessary or advisable for
the administration of this Agreement. All such acts, calculations,
interpretations and determinations (including, for the purposes of clause (y)
below, all omissions with respect to the foregoing) that are done or made by
the Board of Directors of the Company in good faith (x) shall be final,
conclusive and binding on the Company, the Rights Agent and the holders of the
Rights and all other parties and (y) not subject the Board of Directors to any
liability to the holders of the Rights or any other party.

     Section 33. Severability. If any term, provision, covenant or restriction
of this Agreement is held by a court of competent jurisdiction or other
authority to be invalid, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions of this Agreement shall remain in full
force and effect and shall in no way be affected, impaired or invalidated.

     Section 34. Governing Law. This Agreement and each Right Certificate
issued hereunder shall be deemed to be a contract made under the laws of the
State of Minnesota and for all purposes shall be governed by and construed in
accordance with the laws of such state applicable to contracts to be made and
performed entirely within such state.

-46-

 

     Section 35. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.

     Section 36. Descriptive Headings. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.

-47-

 

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

     Attest: WINLAND ELECTRONICS, INC.

	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	
By:
	 	 	 	By:	 	 	 	 	 
	 	 	 	 	

	 	 	 	
	 
	Name:	 	Jennifer Thompson	 	 	 	Name:	 	Lorin E. Krueger	 
	Title:	 	Assistant Secretary	 	 	 	Title:	 	President and Chief Executive Officer	 

     Attest: WELLS FARGO BANK MINNESOTA, N.A

	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	
By:
	 	 	 	By:	 	 	 	 	 
	 	 	 	 	

	 	 	 	
	 
	 	 	Name:	 	

	 	 	 	Name:	 	
	 
	 	 	Title:	 	
	 	 	 	Title:	 	
	 

-48-

 

     FORM

of

CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS

of

SERIES A JUNIOR PARTICIPATING PREFERRED SHARES

of

WINLAND ELECTRONICS, INC.

     I, Jennifer Thompson, the Assistant Secretary of Winland Electronics,
Inc., a corporation organized and existing under the Business Corporation Act
of the State of Minnesota (hereinafter called the “Corporation”), in accordance
with the provisions of Section 302A.401 thereof, DO HEREBY CERTIFY:

     That pursuant to the authority conferred upon the Board of Directors of
the Corporation (hereinafter called “the Board of Directors” or the “Board”) by
the Restated Articles of Incorporation of the Corporation, as amended (the
“Restated Articles”), the Board on December 9, 2003, adopted the following
resolution creating a series of sixty thousand (60,000) shares of
preferred stock of the par value of $.01 per share designated as Series A
Junior Participating Preferred Stock:

A-1

 

          RESOLVED, that pursuant to the authority granted to and vested in the
Board in accordance with the provisions of the Restated Articles, the Board
hereby creates a series of preferred stock of the Corporation (the “Preferred
Stock”), and hereby states the designation and number of shares, and fixes the
relative rights and preferences of the shares of such series of Preferred Stock
as follows:

          Series A Junior Participating Preferred Stock:

          Section 1. Designation and Amount. The shares of such series shall be
designated as “Series A Junior Participating Preferred Stock” (the “Series A
Preferred Stock”) and the number of shares constituting the Series A Preferred
Stock shall be 60,000. Such number of shares may, unless prohibited by the
Restated Articles of Incorporation or by applicable law of the State of
Minnesota, be increased or decreased by resolution of the Board of Directors;
provided, that no decrease shall reduce the number of shares of Series A
Preferred Stock to a number less than the number of shares then outstanding
plus the number of shares reserved for issuance upon the exercise of
outstanding options, rights or warrants or upon the conversion of any
outstanding securities issued by the Corporation convertible into Series A
Preferred Stock.

          Section 2. Dividends and Distributions.

(A) Subject to the rights of the holders of any shares of any series
of Preferred Stock (or any similar stock) ranking prior and superior to
the Series A Preferred Stock with respect to dividends, the holders of
shares of Series A Preferred Stock, in preference to the holders of
Common Stock of the Corporation, and of any other junior stock, shall be
entitled to receive, when, as and if declared by the Board of Directors
out of funds legally available for the purpose, quarterly dividends
payable in cash on the first day of March, June, September and December
in each year (each such date being referred to herein as a “Quarterly
Dividend Payment Date”), commencing on the first Quarterly Dividend
Payment Date after the first issuance of a share or fraction of a share
of Series A Preferred stock, in an amount per share (rounded to the
nearest cent) equal to the greater of (a) $1 or (b) subject to the
provision for adjustment hereinafter set forth, 100 times the aggregate
per share amount of all cash dividends, and 100 times the aggregate per
share amount (payable in kind) of all non-cash dividends or other
distributions, other than a dividend payable in shares of Common Shares
or a subdivision of the outstanding shares of Common Stock (by
reclassification or otherwise), declared on the Common Stock since the
immediately preceding Quarterly Dividend Payment Date or, with respect to
the first Quarterly Dividend Payment Date, since the first issuance of
any share or a fraction of a share of Series A Preferred Stock. In the
event the Corporation shall at any time declare or pay any dividend on
the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding Common
Stock (by reclassification or otherwise than by payment of a dividend in
shares of Common Stock) into a greater or lesser number of shares of
Common Stock, then in each

A-2

 

such case the amount to which holders of Series A Preferred Shares
were entitled immediately prior to such event under clause (b) of the
preceding sentence shall be adjusted by multiplying such amount by a
fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately
prior to such event.

(B) The Corporation shall declare a dividend or distribution on the
Series A Preferred Stock as provided in paragraph (A) of this Section
immediately after it declares a dividend or distribution on the Common
Stock (other than a dividend payable in shares of Common Stock); provided
that, in the event no dividend or distribution shall have been declared
on the Common Stock during the period between any Quarterly Dividend
Payment Date and the next subsequent Quarterly Dividend Payment Date, a
dividend of $1 per share on the Series A Preferred Stock shall
nevertheless be payable on such subsequent Quarterly Dividend Payment
Date.

(C) Dividends shall begin to accrue and be cumulative on outstanding
Series A Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares, unless the date of issue of
such shares is prior to the record date for the first Quarterly Dividend
Payment Date, in which case dividends on such shares shall begin to
accrue from the date of issue of such shares, or unless the date of issue
is a Quarterly Dividend Payment Date or is a date after the record date
for the determination of holders of shares of Series A Preferred Stock
entitled to receive a quarterly dividend and before such Quarterly
Dividend Payment Date, in either of which events such dividends shall
begin to accrue and be cumulative from such Quarterly Dividend Payment
Date. Accrued but unpaid dividends shall not bear interest. Dividends
paid on the shares of Series A Preferred Stock in an amount less than the
total amount of such dividends at the time accrued and payable on such
shares shall be allocated pro rata on a share-by-share basis among all
such shares at the time outstanding. The Board of Directors may fix a
record date for the determination of holders of shares of Series A
Preferred Stock entitled to receive payment of a dividend or distribution
declared thereon, which record date shall be not more than 60 days prior
to the date fixed for the payment thereof.

          Section 3. Voting Rights. The holders of shares of Series A Preferred
Stock shall have the following voting rights:

(A) Subject to the provision for adjustment hereinafter set forth,
each share of Series A Preferred Stock shall entitle the holder thereof
to 100 votes on all matters submitted to a vote of the stockholders of
the Corporation. In the event the Corporation shall at any time declare
or pay any dividend on the Common Stock payable in shares of Common
Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise than
by payment of a dividend in shares of Common Stock) into a greater or
lesser number of shares of Common Stock, then in each such case the
number of votes per share to which holders of shares of Series A
Preferred Stock were entitled immediately prior to such event shall be
adjusted by multiplying such number by a fraction, the numerator of which
is the number of shares of Common Stock outstanding immediately after
such event and the denominator

A-3

 

of which is the number of shares of Common Stock that were outstanding
immediately prior to such event.

(B) Except as otherwise provided herein, in any other Certificate of
Designations creating a series of Preferred Stock or any similar stock,
or by law, the holders of shares of Series A Preferred Stock and the
holders of shares of Common Stock and any other capital stock of the
Corporation having general voting rights shall vote together as one class
on all matters submitted to a vote of stockholders of the Corporation.

(C) Except as set forth herein, or as otherwise provided by law,
holders of Series A Preferred Stock shall have no special voting rights
and their consent shall not be required (except to the extent they are
entitled to vote with holders of Common Stock as set forth herein) for
taking any corporate action.

          Section 4. Certain Restrictions.

(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Preferred Stock as provided in Section 2 are in
arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series A Preferred
Stock outstanding shall have been paid in full, the Corporation shall
not:

(i) declare or pay dividends, or make any other distributions, on
any shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred Stock;

(ii) declare or pay dividends, or make any other distributions, on
any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Preferred
Stock, except dividends paid ratably on the Series A Preferred Stock and
all such parity stock on which dividends are payable or in arrears in
proportion to the total amounts to which the holders of all such shares
are then entitled;

(iii) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred Stock,
provided that the Corporation may at any time redeem, purchase or
otherwise acquire shares of any such junior stock in exchange for shares
of any stock of the Corporation ranking junior (either as to dividends or
upon dissolution, liquidation or winding up) to the Series A Preferred
Stock; or

(iv) redeem or purchase or otherwise acquire for consideration any
shares of Series A Preferred Stock, or any shares of stock ranking on a
parity with the Series A Preferred Stock, except in accordance with a
purchase offer made in writing or by publication (as determined by the
Board of Directors) to all holders of such shares upon such terms as the
Board of Directors, after consideration of the respective annual dividend
rates and other relative rights and preferences of the respective series
and classes, shall determine in good faith will result in fair and
equitable treatment among the respective series or classes.

A-4

 

(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares
of stock of the Corporation unless the Corporation could, under paragraph
(A) of this Section 4, purchase or otherwise acquire such shares at such
time and in such manner.

          Section 5. Reacquired Shares. Any shares of Series A Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and cancelled promptly after the acquisition thereof. All
such shares shall upon their cancellation become authorized but unissued shares
of Preferred Stock and may be reissued as part of a new series of Preferred
Stock subject to the conditions and restrictions on issuance set forth herein,
in the Articles of Incorporation, or in any other Certificate of Designations
creating a series of Preferred Stock or any similar stock or as otherwise
required by law.

          Section 6. Liquidation, Dissolution or Winding Up. Upon any liquidation,
dissolution or winding up of the Corporation, no distribution shall be made (1)
to the holders of shares of stock ranking junior (either as to dividends or
upon liquidation, dissolution or winding up) to the Series A Preferred Stock
unless, prior thereto, the holders of shares of Series A Preferred Stock shall
have received $100 per share, plus an amount equal to accrued and unpaid
dividends and distributions thereon, whether or not declared, to the date of
such payment, provided that the holders of shares of Series A Preferred Stock
shall be entitled to receive an aggregate amount per share, subject to the
provision for adjustment hereinafter set forth, equal to 100 times the
aggregate amount to be distributed per share to holders of shares of Common
Stock, or (2) to the holders of shares of stock ranking on a parity (either as
to dividends or upon liquidation, dissolution or winding up) with the Series A
Preferred Stock, except distributions made ratably on the Series A Preferred
Stock and all such parity stock in proportion to the total amounts to which the
holders of all such shares are entitled upon such liquidation, dissolution or
winding up. In the event the Corporation shall at any time declare or pay any
dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock,
then in each such case the aggregate amount to which holders of shares of
Series A Preferred Stock were entitled immediately prior to such event under
the proviso in clause (1) of the preceding sentence shall be adjusted by
multiplying such amount by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.

          Section 7. Consolidation, Merger, etc. In case the Corporation shall
enter into any consolidation, merger, share exchange, combination or other
transaction in which the shares of Common Stock are exchanged for or changed
into other stock or securities, cash and/or any other property, then in any
such case each share of Series A Preferred Stock shall at the same time be
similarly exchanged or changed into an amount per share, subject to the
provision for adjustment hereinafter set forth, equal to 100 times the
aggregate amount of stock, securities, cash and/or any other property (payable
in kind), as the case may be, into which or for which each share of Common
Stock is changed or exchanged. In the event the Corporation shall at any time
declare or pay any dividend on the Common Stock payable in shares of Common
Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock

A-5

 

(by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock,
then in each such case the amount set forth in the preceding sentence with
respect to the exchange or change of shares of Series A Preferred Stock shall
be adjusted by multiplying such amount by a fraction, the numerator of which is
the number of shares of Common Stock outstanding immediately after such event
and the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.

          Section 8. No Redemption. The shares of Series A Preferred Stock shall
not be redeemable.

          Section 9. Rank. The Series A Preferred Stock shall rank, with respect to
the payment of dividends and the distribution of assets, junior to all series
of any other class of the Corporation’s Preferred Stock.

          Section 10. Amendment. The Articles of Incorporation of the Corporation
shall not be amended in any manner which would materially alter or change the
powers, preferences or special rights of the Series A Preferred Stock so as to
affect them adversely without the affirmative vote of the holders of at least
two-thirds of the outstanding shares of Series A Preferred Stock, voting
together as a single class.

          IN WITNESS WHEREOF, this Certificate of Designations is executed on behalf
of the Corporation by its Assistant Secretary and attested by its Chief
Executive Officer this 9th day of December 2003.

	 	 
	
	 
	Jennifer A. Thompson, Assistant Secretary	 
	 	 
	Attest:	 
	 	 
	
	 
	Lorin E. Krueger, Chief Executive Officer	 

A-6

 

Exhibit B

Form of Right Certificate

Certificate No. R-           Rights

NOT EXERCISABLE AFTER DECEMBER 9, 2013 OR SUCH EARLIER DATE AS THE BOARD
OF DIRECTORS ORDERS REDEMPTION OR EXCHANGE OF THE RIGHTS. THE RIGHTS ARE
SUBJECT TO REDEMPTION, AT THE OPTION OF THE COMPANY, AT $.001 PER RIGHT
(SUBJECT TO ADJUSTMENT) AND TO EXCHANGE ON THE TERMS SET FORTH IN THE
RIGHTS AGREEMENT. UNDER CERTAIN CIRCUMSTANCES SET FORTH IN THE RIGHTS
AGREEMENT, RIGHTS THAT ARE OR WERE ACQUIRED BENEFICIALLY BY AN ACQUIRING
PERSON OR AN AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS
ARE DEFINED IN THE RIGHTS AGREEMENT) MAY BECOME NULL AND VOID.

Right Certificate

WINLAND ELECTRONICS, INC.

This certifies that           , or registered assigns, is the
registered owner of the number of Rights set forth above, each of which
entitles the owner thereof, subject to the terms, provisions and conditions of
the Rights Agreement, dated as of December 9, 2003 (the “Agreement”), between
Winland Electronics, Inc., a Minnesota corporation (the “Company”), and Wells
Fargo Bank Minnesota, N.A. (the “Rights Agent”), to purchase from the Company
at any time after the Distribution Date (as such term is defined in the
Agreement) and prior to 5:00 P.M., Minneapolis time, on December 9, 2013 at the
principal office of the Rights Agent, or at the office of its successor as
Rights Agent, one one-hundredth of a fully paid non-assessable share of Series
A Junior Participating Preferred Stock, par value $.01 per share, of the
Company (the “Preferred Shares”), at a purchase price of $36 per one
one-hundredth of a Preferred Share (the “Purchase Price”), upon presentation
and surrender of this Right Certificate with the Form of Election to Purchase
duly executed. The number of Rights evidenced by this Right Certificate (and
the number of one one-hundredths of a Preferred Share which may be purchased
upon exercise hereof) set forth above, and the Purchase Price set forth above,
are the number and Purchase Price as of December 9, 2003, based on the
Preferred Shares as constituted at such date. As provided in the Agreement,
the Purchase Price and the number of one one-hundredths of a Preferred Share
which may be purchased upon the exercise of the Rights evidenced by this Right
Certificate are subject to modification and adjustment upon the happening of
certain events.

This Right Certificate is subject to all of the terms, provisions and
conditions of the Agreement, which terms, provisions and conditions are hereby
incorporated herein by reference and made a part hereof and to which Agreement
reference is hereby made for a full description of the rights, limitations of
rights, obligations, duties and immunities hereunder of the Rights

B-1

 

Agent, the Company and the holders of the Right Certificates. Copies of
the Agreement are on file at the principal executive offices of the Company and
the offices of the Rights Agent.

This Right Certificate, with or without other Right Certificates, upon
surrender at the principal office of the Rights Agent, may be exchanged for
another Right Certificate or Right Certificates of like tenor and date
evidencing Rights entitling the holder to purchase a like aggregate number of
Preferred Shares as the Rights evidenced by the Right Certificate or Right
Certificates surrendered shall have entitled such holder to purchase. If this
Right Certificate shall be exercised in part, the holder shall be entitled to
receive upon surrender hereof another Right Certificate or Right Certificates
for the number of whole Rights not exercised.

Subject to the provisions of the Agreement, the Rights evidenced by this
Right Certificate (i) may, but are not required to, be redeemed by the Company
at a redemption price of $.001 per Right or (ii) may, but are not required to,
be exchanged in whole or in part for Preferred Shares or shares of the
Company’s Common Stock.

No fractional Preferred Shares will be issued upon the exercise of any
Right or Rights evidenced hereby (other than fractions which are integral
multiples of one one-hundredth of a Preferred Share, which may, at the election
of the Company, be evidenced by depositary receipts), but, in lieu thereof, a
cash payment will be made, as provided in the Agreement.

No holder of this Right Certificate shall be entitled to vote or receive
dividends or be deemed for any purpose the holder of the Preferred Shares or of
any other securities of the Company which may at any time be issuable on the
exercise hereof, nor shall anything contained in the Agreement or herein be
construed to confer upon the holder hereof, as such, any of the rights of a
shareholder of the Company or any right to vote for the election of directors
or upon any matter submitted to shareholders at any meeting thereof, or to
give or withhold consent to any corporate action, or to receive notice of
meetings or other actions affecting shareholders (except as provided in the
Agreement), or to receive dividends or subscription rights, or otherwise, until
the Right or Rights evidenced by this Right Certificate shall have been
exercised as provided in the Agreement.

This Right Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by the Rights Agent.

WITNESS the facsimile signature of the proper officers of the Company.
Dated as of                     ,           .

	 	 	 	 	 	 	 	 
	 	 	
ATTEST:
	 	WINLAND ELECTRONICS, INC.	 
	 	 	 	 	 	 	 	 
	 	 	 	 	By	 	 	 
	 	 	

	 	 	 	
	 
	 	 	
Name:
	 	Name:	 	 	 
	 	 	
Title:
	 	Title:	 	 	 

B-2

 

     Countersigned:

     WELLS FARGO BANK MINNESOTA, N.A.

     By           

B-3

 

          Form of Reverse Side of Right Certificate

          FORM OF ASSIGNMENT

          (To be executed by the registered holder if such
holder desires to transfer the Right Certificate.)

          FOR VALUE RECEIVED                  
           hereby sells, assigns
and transfers unto
                           
                  
                  

                        
              
              
              
              
              
              
              
   
                 
                 
                 
                 
                 

(Please print name and address of transferee)

                        
              
              
              
              
              
              
   
                 
                 
                 
                 
                 
                 

this Right Certificate, together with all right, title and interest
therein, and does hereby irrevocably constitute and appoint             

Attorney, to transfer the within
Right Certificate on the books of the within-named Company, with full
power of substitution.

	 	 	 	 
	Dated:	 	 	 
	 	 	

	 
	Signature	 	 	 
	 	 	

     Signature Guaranteed:

     Signatures must be guaranteed by a member firm of a registered national
securities exchange, a member of the National Association of Securities
Dealers, Inc., or a commercial bank or trust company having an office or
correspondent in the United States.

     The undersigned hereby certifies that the Rights evidenced by this Right
Certificate are not beneficially owned by an Acquiring Person or an Affiliate
or Associate thereof (as defined in the Agreement).

B-4

 

	 	 	 	 
	 	 	

	 
	Signature	 	 	 

B-5

 

     Form of Reverse Side of Right Certificate — continued

     FORM OF ELECTION TO PURCHASE

     (To be executed if holder desires to exercise

     Rights represented by the Right Certificate.)

     To: WINLAND ELECTRONICS, INC.

     The undersigned hereby irrevocably elects to exercise           
Rights represented by this Right Certificate to purchase the Preferred
Shares issuable upon the exercise of such Rights and requests that certificates
for such Preferred Shares be issued in the name of:

     Please insert social security or other identifying number

               

     (Please print name and address)

               

     If such number of Rights shall not be all the Rights evidenced by this
Right Certificate, a new Right Certificate for the balance remaining of such
Rights shall be registered in the name of and delivered to:

     Please insert social security or other identifying number

               

     (Please print name and address)

               

B-6

 

	 	 	 	 
	Dated:	 	 	 
	 	 	

	 

     Signature

     Signature Guaranteed:

     Signatures must be guaranteed by a member firm of a registered national
securities exchange, a member of the National Association of Securities
Dealers, Inc., or a commercial bank or trust company having an office or
correspondent in the United States.

     The undersigned hereby certifies that the Rights evidenced by this Right
Certificate are not beneficially owned by an Acquiring Person or an Affiliate
or Associate thereof (as defined in the Agreement).

     Signature

     NOTICE

     The signature in the Form of Assignment or Form of Election to Purchase,
as the case may be, must conform to the name as written upon the face of this
Right Certificate in every particular, without alteration or enlargement or any
change whatsoever.

     In the event the certification set forth above in the Form of Assignment
or the Form of Election to Purchase, as the case may be, is not completed, the
Company and the Rights Agent will deem the beneficial owner of the Rights
evidenced by this Right Certificate to be an Acquiring Person or an Affiliate
or Associate thereof (as defined in the Agreement) and such Assignment or
Election to Purchase will not be honored.

B-7

 

Exhibit C

SUMMARY OF RIGHTS TO PURCHASE PREFERRED SHARES

Introduction

     On December 9, 2003, the Board of Directors of our Company, Winland
Electronics, Inc., a Minnesota corporation, declared a dividend of one
preferred share purchase right (a “Right”) for each outstanding share of common
stock, par value $.01 per share. The dividend is payable on December 31, 2003
to the shareholders of record at the close of business on December 31, 2003.

     Our Board has adopted this Rights Agreement to protect stockholders from
coercive or otherwise unfair takeover tactics and to protect the long term
interests of our stockholders. In general terms, it works by imposing a
significant penalty upon any person or group which acquires 15% or more of our
outstanding common stock without the approval of our Board. The Rights
Agreement should not interfere with any merger or other business combination
approved by our Board.

     For those interested in the specific terms of the Rights Agreement as made
between our Company and Wells Fargo Bank Minnesota, N.A., as the Rights Agent,
on December 9, 2003, we provide the following summary description. Please
note, however, that this description is only a summary, and is not complete,
and should be read together with the entire Rights Agreement, which has been
filed with the Securities and Exchange Commission as an exhibit to a
Registration Statement on Form 8-A dated December 10 , 2003. A copy of the
agreement is available free of charge from us.

The Rights. Our Board authorized the issuance of a Right with respect to each
outstanding share of common stock on December 31, 2003. The Rights will
initially trade with, and will be inseparable from, the common stock. The
Rights are evidenced initially only by the certificates that represent shares
of common stock. New Rights will accompany any new shares of common stock we
issue after December 31, 2003 until the Distribution Date described below.

Exercise Price. Each Right will allow its holder to purchase from our Company
one one-hundredth of a share of Series A Junior Participating Preferred Stock
(a “Preferred Share”) for $36, once the Rights become exercisable. This
portion of a Preferred Share will give the share

C-1

 

holder approximately the same dividend, voting, and liquidation rights as would
one share of common stock. Prior to exercise, the Right does not give its
holder any dividend, voting, or liquidation rights.

Exercisability. The Rights will not be exercisable until:

15 days after the public announcement that a person or group has become an
“Acquiring Person” by obtaining beneficial ownership of 15% or more of our
outstanding common stock (other than as a result of a Permitted Offer and
subject to certain expections), or, if earlier,

15 business days (or a later date determined by our Board before any person or
group becomes an Acquiring Person) after a person or group begins a tender or
exchange offer which, if completed, would result in that person or group
becoming an Acquiring Person.

     A Permitted Offer is a tender offer or an exchange offer for all
outstanding Common Shares of the Company determined by our Board of Directors,
after receiving such advice as it deems necessary and giving due consideration
to all relevant factors, to be in the best interests of the Company and its
shareholders.

     We refer to the date when the Rights become exercisable as the
“Distribution Date.” Until that date, the common stock certificates will also
evidence the Rights, and any transfer of shares of common stock will constitute
a transfer of Rights. After that date, the Rights will separate from the
common stock and be evidenced by book-entry credits or by Rights certificates
that we will mail to all eligible holders of common stock. Any Rights held by
an Acquiring Person are void and may not be exercised.

     Our Board may reduce the threshold at which a person or group becomes an
Acquiring Person from 15% to not less than 10% of the outstanding common stock.

     Consequences of a Person or Group Becoming an Acquiring Person.

Flip In. If a Rights Distribution Date occurs and a person or group is, or
becomes, an Acquiring Person, all holders of Rights except the Acquiring Person
may, for $36, purchase shares of our common stock with a market value of $72,
based on the market price of the common stock prior to such acquisition.

Flip Over. If our Company is later acquired in a merger or similar transaction
after a Rights Distribution Date occurs and a person or group is, or becomes,
an Acquiring Person, all holders of Rights except the Acquiring Person may, for
$36, purchase shares of the acquiring corporation with a market value of $72
based on the market price of the acquiring corporation’s stock, prior to such
merger.

Preferred Share Provisions.

Each one one-hundredth of a Preferred Share, if issued:

will not be redeemable.

C-2

 

will entitle holders to quarterly dividend payments of $.01 per one
one-hundredth of a Preferred Share, or an amount equal to the dividend paid on
one share of common stock, whichever is greater.

will entitle holders upon liquidation either to receive $1 per one
one-hundredth of a Preferred Share or an amount equal to the payment made on
one share of common stock, whichever is greater.

will have the same voting power as one share of common stock.

will, if shares of our common stock are exchanged via merger, consolidation,
share exchange or a similar transaction, entitle holders to a per share payment
equal to the payment made on one share of common stock.

The value of a one one-hundredth interest in a Preferred Share should
approximate the value of one share of common stock.

Expiration. The Rights will expire on December 9, 2013.

Redemption. Our Board may redeem the Rights for $.001 per Right at any time
prior to the Close of Business on the earlier of (i) the Distribution Date or
(ii) the Final Expiration Date. If our Board redeems any Rights, it must
redeem all of the Rights. Once the Rights are redeemed, the only right of the
holders of Rights will be to receive the redemption price of $.001 per Right.
The redemption price will be adjusted if we have a stock split or stock
dividends of our common stock.

Exchange. After a Rights Distribution Date occurs, but before an Acquiring
Person owns 50% or more of our outstanding common stock, our Board may
extinguish the Rights by exchanging one share of common stock or an equivalent
security for each Right, other than Rights held by the Acquiring Person.

Anti-Dilution Provisions. Our Board may adjust the purchase price of the
Preferred Shares, the number of Preferred Shares issuable and the number of
outstanding Rights to prevent dilution that may occur from a stock dividend, a
stock split, a reclassification of the Preferred Shares or common stock. No
adjustments to the Exercise Price of less than 1% will be made.

     Amendments. The terms of the Rights Agreement may be amended by our Board
without the consent of the holders of the Rights. However, our Board may not
amend the Rights Agreement to lower the threshold at which a person or group
becomes an Acquiring Person to below 10% of our outstanding common stock. In
addition, the Board may not cause a person or group to become an Acquiring
Person by lowering this threshold below the percentage interest
that such person or group already owns. From and after a Distribution
Date, our Board may not amend the agreement in a way that adversely affects
holders of the Rights.

C-3<PAGE>

                                                                    EXHIBIT 10.1

                              TERMINATION AGREEMENT

         THIS TERMINATION AGREEMENT (the "Agreement") is entered into as of the
3rd day of September, 2003, by and between HRB Management, Inc., a Missouri
corporation ("HRB"), and Frank J. Cotroneo ("Cotroneo").

                                   ARTICLE ONE

                            TERMINATION OF EMPLOYMENT

         1. Mutual Agreement to Terminate Employment Agreement. HRB and Cotroneo
acknowledge and agree that they are parties to an Employment Agreement dated
January 26, 2000 (the "Employment Agreement"), and that they desire to terminate
Cotroneo's employment under the Employment Agreement by this Agreement. The
parties agree that such termination of employment is mutual and shall not be
considered a termination for or without "cause" or for "good reason" (as such
terms are defined in the Employment Agreement), except as noted for the sole
purpose described in Section 4(a)(iii) of this Agreement. Such employment and
the Employment Agreement will terminate effective as of the close of business on
October 31, 2003, or such earlier date as is mutually agreed upon by the parties
in writing (the "Termination Date"). By this Agreement, the parties agree to
waive any notice of termination required by the Employment Agreement.

         2. Surviving Obligations. Notwithstanding the above, the termination of
Cotroneo's employment will not affect the following provisions of the Employment
Agreement which, by their express terms as set forth therein, impose continuing
obligations on one or more of the parties following termination of the
Employment Agreement:

              o   Article Two, "Confidentiality," Sections 2.01, 2.02

              o   Article Three, "Non-Hiring; No Conflicts; Noncompetition,"
                  Sections 3.01, 3.02, 3.04, 3.05

              o   Article Four, "Miscellaneous," Section 4.06.

         3. Resignation as Officer.

         (a) Cotroneo will resign (i) as Senior Vice President and Chief
Financial Officer of H&R Block, Inc. ("Block") and (ii) from any and all officer
and director positions held with HRB and all other subsidiaries of Block (all
such other subsidiaries of Block, collectively "Affiliates" and individually an
"Affiliate"). Such resignations will be effective as of the Termination Date,
except as provided in Section 3(b) of this Agreement. Cotroneo will execute
resignations in the form attached hereto as Exhibit A contemporaneously with his
execution of this Agreement.

         (b) Cotroneo acknowledges that Block is undertaking a search for a new
Chief Financial Officer and, in the event Block is prepared to elect a new Chief
Financial Officer prior to the Termination Date, Cotroneo agrees to accelerate
his resignation as Senior Vice President and Chief Financial Officer of Block
and execute a new resignation effective as of the date Block elects such new
Chief Financial Officer. Such accelerated resignation shall have no effect on
Cotroneo's continued employment with HRB through the Termination Date

                                       1
<PAGE>

and shall not provide grounds for Cotroneo to terminate the Employment Agreement
for "good reason."

         4. Continued Employment: Compensation and Benefits.

         (a) In consideration of Cotroneo's promises herein, HRB agrees to
continue to employ Cotroneo through the Termination Date, and that Cotroneo will
be paid his base salary (at the rate of $389,000 per year) and benefits as of
the date of this Agreement through the Termination Date. Upon Cotroneo's
execution of the release agreement attached hereto as Exhibit B (the "Release
Agreement") on the Termination Date, HRB will agree to provide the
compensation and benefits as follows and as described in the Release Agreement
on the terms described therein:

                  (i) In further consideration for Cotroneo's promises herein,
         HRB will pay to Cotroneo $301,476 (which amount represents an aggregate
         of one-half of Cotroneo's (A) annual base salary and (B) target
         short-term incentive compensation for HRB's fiscal year 2004, each
         determined as of the date of this Agreement) over the 6-month period
         beginning on the Termination Date in semi-monthly equal installments of
         $25,123 (less required tax withholdings and elected benefit
         withholdings). Such payments shall not encompass payment to Cotroneo
         for any unused vacation or other paid time off accrued as of the
         Termination Date, payment for which will be made in accordance with
         HRB's policy as soon as administratively feasible after the Termination
         Date.

                  (ii) Cotroneo will remain eligible to participate in those
         health and welfare plans maintained by HRB offering medical, dental,
         vision, employee assistance, flexible spending account, life insurance,
         and accidental death and dismemberment insurance benefits during the
         6-month period beginning on the Termination Date on the same basis as
         employees of HRB, after which Cotroneo may be eligible to continue
         coverage of those benefits provided under group health plans in
         accordance with his rights under Section 4980B of the Internal Revenue
         Code.

                  (iii) For the limited purpose of permitting Cotroneo to
         exercise those stock options to purchase shares of Block's common stock
         granted to Cotroneo by Block ("Stock Options") that are outstanding and
         exercisable as of the Termination Date, for the first 3 months after
         the Termination Date, HRB agrees to characterize Cotroneo's termination
         of employment as a termination of employment by HRB without "cause."
         Such characterization shall have no effect on the number of Stock
         Options outstanding and exercisable as of the Termination Date. A list
         of the Stock Options existing and exercisable as of the date of this
         Agreement is attached hereto as Exhibit C.

         (b) The compensation and benefits described in Section 4(a) of this
Agreement will cease and no further compensation and benefits will be provided
to Cotroneo under the Release Agreement if Cotroneo knowingly violates any of
his post-employment obligations as set forth in Sections 2 and 6 of this
Agreement. If Cotroneo unknowingly violates any of his post-employment
obligations as set forth in Sections 2 and 6 of this Agreement, Cotroneo agrees
to take such actions as are necessary to correct the violation(s) once he is
made aware of the violation(s).

                                       2
<PAGE>

         (c) The parties agree that, in accordance with Section 1.06(c) of the
Employment Agreement, HRB shall have no further financial obligations to
Cotroneo under the Employment Agreement and no further payments of base salary
or other compensation or benefits shall be payable by HRB to Cotroneo, except
(i) as required by the express terms of any written benefit plans or written
arrangements maintained by HRB and applicable to Cotroneo as of the Termination
Date, (ii) as may be required by law, or (iii) as have been mutually agreed upon
between the parties in this Agreement.

         (d) Upon Cotroneo's execution of the Release Agreement on the
Termination Date, HRB, on behalf of itself, Block, and Affiliates, will on the
Termination Date also execute the Release Agreement as provided for therein.

         5. Business Expenses: Commitments. HRB will promptly pay directly, or
reimburse Cotroneo for, all business expenses to the extent such expenses are
paid or incurred by Cotroneo during the term of the Employment Agreement in
accordance with HRB's policy in effect from time to time and to the extent such
expenses were reasonable and necessary to the conduct by Cotroneo of HRB's
business. During the period from the date of this Agreement through the
Termination Date and at all times thereafter, Cotroneo will not initiate, make,
renew, confirm or ratify any contracts or commitments for or on behalf of Block,
HRB or any Affiliate without Block's prior written consent.

         6. Cotroneo's Responsibilities.

         (a) During the period from the date of this Agreement through the
Termination Date, Cotroneo will act in a manner consistent with the standards of
conduct and performance he has observed during his employment with HRB and will
cooperate with management of Block, HRB and any Affiliate as requested in
providing information regarding areas of his expertise and experience with
Block. Cotroneo acknowledges that his employment responsibilities may be reduced
prior to the Termination Date at HRB's sole discretion and that any such
reduction in employment responsibilities shall not provide grounds for Cotroneo
to terminate the Employment Agreement for "good reason."

         (b) After the Termination Date and for a period of one year thereafter,
in the event a (i) claim is asserted against Block, HRB or any Affiliate and/or
their respective employees, agents, officers, or directors or (ii) a government
investigation is commenced with respect to Block, HRB or any Affiliate and/or
their respective employees, agents, officers, or directors, Cotroneo will,
without compensation, except for reimbursement for any out-of-pocket expenses,
provide reasonable assistance and cooperation with Block, HRB and Affiliates in
connection with such a claim or government investigation. Thereafter Cotroneo
will similarly assist and cooperate with Block, HRB and/or Affiliates, for which
he will be reimbursed for his costs and paid reasonable compensation for his
time, as agreed upon by the parties, except in litigation matters where Cotroneo
is a named party. In such cases Cotroneo will continue to provide reasonable
cooperation, as requested, and will receive reimbursement for his costs, but
receive no compensation for his time.

         (c) Cotroneo will not at any time or in any manner (i) defame Block,
HRB, or any Affiliate or their respective past or present directors and
employees, (ii) make disparaging statements to the media, or to any employee or
contractor of Block, HRB or any other Affiliate, concerning Block, HRB or any
Affiliate, their respective past or present directors

                                       3
<PAGE>

and employees concerning any matter related to his employment or non-employment,
or (iii) do any deliberate act designed primarily to injure the business or
reputation of Block, HRB or any Affiliate. Nothing in this provision shall be
construed to prevent Cotroneo from responding to a subpoena or other lawfully
issued summons, or from providing truthful information to any law enforcement or
administrative agency or prospective employer; or from making appropriate
disclosures to counsel for Block, HRB, or any Affiliate, to Block's external
auditors, or to the Audit Committee of the Board of Directors of Block, as to
any subject within the scope of Cotroneo's employment. Cotroneo agrees that any
information permitted to be provided to a prospective employer pursuant to the
prior sentence will not include information required to be held confidential in
accordance with his post-employment obligations set forth in Section 2 of this
Agreement.

          7. HRB's Responsibilities. Neither HRB, Block, any Affiliates, nor any
of their senior executive officers or directors will at any time or in any
manner (i) defame Cotroneo, (ii) make disparaging statements to the media or to
any employee or contractor of HRB, Block or Affiliates regarding Cotroneo, his
performance, character, status or any other personal or professional matter, or
(iii) do any deliberate act designed in whole or in part to injure, embarrass or
damage Cotroneo's reputation, or interfere with his ability to obtain new
employment. HRB and Cotroneo agree that HRB will respond to inquiries from
Cotroneo's prospective new employers by providing the letter attached hereto as
Exhibit D, and will otherwise only act consistently with its then-current
practice of providing certain limited information to prospective employers of
former employees. Cotroneo agrees that furnishing such letter and complying with
such practice shall not constitute interference with his ability to obtain new
employment. Nothing in this provision shall be construed to prevent HRB, Block,
or any Affiliates from responding to a subpoena or other lawfully issued
summons, or from providing truthful information to any law enforcement or
administrative agency.

         8. Third-Party Beneficiary. The parties hereto agree that Block is a
third-party beneficiary as to the obligations imposed upon Cotroneo under the
Employment Agreement and this Agreement and as to the rights and privileges to
which HRB is entitled pursuant to the Employment Agreement and this Agreement,
and that Block is entitled to all of the rights and privileges associated with
such third-party-beneficiary status.

         9. Successors and Assigns. This Agreement and each of its provisions
will be binding upon Cotroneo and the heirs, executors, successors and
administrators of Cotroneo or his estate and property, and will inure to the
benefit of HRB, Block and their successors and assigns. Cotroneo may not assign
or transfer to others the obligation to perform his duties hereunder.

         10. Specific Performance. The parties acknowledge that money damages
alone will not adequately compensate HRB, Block or Cotroneo for breach of any of
the covenants and agreements herein and, therefore, in the event of the breach
or threatened breach of any such covenant or agreement by either party, in
addition to all other remedies available at law, in equity or otherwise, a
wronged party will be entitled to injunctive relief compelling specific
performance of (or other compliance with) the terms hereof.

         11. Disputes. In the event that after the parties have executed this
Agreement, there is a dispute or disagreement between the pates as to the
interpretation, implementation or enforcement of any aspect of this Agreement,
the parties agree to submit

                                       4
<PAGE>

such dispute or disagreement to non-binding mediation. In the event any such
dispute or disagreement is not resolved by mediation, the prevailing party in
any subsequent litigation shall be entitled to reimbursement for reasonable
legal fees that party expended in the mediation and litigation.

         12. Entire Agreement. This Agreement, the Release Agreement (if such
Release Agreement is fully executed), and the surviving post-termination
obligations of the Employment Agreement constitute the entire agreement and
understanding between HRB and Cotroneo concerning the subject matter hereof. No
modification, amendment, termination, or waiver of this Agreement will be
binding unless in writing and signed by Cotroneo and a duly authorized officer
of HRB. Failure of HRB, Block or Cotroneo to insist upon strict compliance with
any of the terms, covenants, or conditions hereof will not be deemed a waiver of
such terms, covenants, and conditions.

         13. Notices. Notices hereunder will be deemed delivered five days
following deposit thereof in the United States mail (postage prepaid) addressed
to Cotroneo at 11709 High Drive, Leawood, Kansas 66211; and to HRB at 4400 Main
Street, Kansas City, Missouri 64111; Attn: Mark A. Ernst, with a copy to James
H. Ingraham, Esq., H&R Block, Inc., 4400 Main Street, Kansas City, Missouri
64111; or to such other address and/or person designated by any party in writing
to the other parties.

         14. Counterparts. This Agreement may be signed in counterparts and
delivered by facsimile transmission confirmed promptly thereafter by actual
delivery of executed counterparts.

          Executed as a sealed instrument under, and to be governed by,
construed and enforced in accordance with, the laws of the State of Missouri.

/s/ Frank J. Cotroneo
---------------------
Frank J. Cotroneo

Dated:   9/4/03
       ----------

HRB Management, Inc.
a Missouri corporation

By: /s/ Mark A. Ernst
    ------------------
    Mark A. Ernst
    President and Chief Executive Officer

Dated: 4 Sept. 03
       ----------

                                       5
<PAGE>

                                    EXHIBIT A

                                   RESIGNATION

TO: The Board of Directors of [Name of Company]:
                              -----------------
         Effective October 31, 2003, I hereby resign as [position] of [Name of
Company], a [Name of State] corporation.

Dated:
       --------------------------                 ------------------------------
                                                  Frank J. Cotroneo

                                      A-1
<PAGE>

                                    EXHIBIT B

                                RELEASE AGREEMENT

         THIS RELEASE AGREEMENT ("this Release Agreement") is entered into as of
the 31st day of October 2003, by and between HRB Management, Inc., a Missouri
corporation ("HRB"), and Frank J. Cotroneo ("Cotroneo").

         WHEREAS, HRB and Cotroneo are parties to an Agreement dated as of
September 3, 2003, under which the parties mutually agreed to terminate the
Employment Agreement dated January 26, 2000, by and between HRB and Cotroneo
(the "Employment Agreement"), and Cotroneo's employment thereunder (the
"Termination Agreement").

          NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, the sufficiency of which is hereby acknowledged, the
pates agree as follows:

         1. Release by Cotroneo. In consideration of HRB's promise to Cotroneo
of the compensation and benefits specified in Section 5 of this Release
Agreement and Section 4 of the Termination Agreement, Cotroneo for himself and
for his relations, heirs, legal representatives, and assigns unconditionally
releases and forever discharges H&R Block, Inc. ("Block"), HRB and each other
subsidiary of Block (each such other subsidiary an "Affiliate"), their
respective present and past directors, officers, employees, agents,
predecessors, successors, and assigns of and from any and all claims, demands,
actions, causes of action and suits of any kind whatsoever, whether under
federal or state statute, local regulation or at common law or which thereafter
arise from any matter, fact, circumstance, event, happening or thing whatsoever
occurring or failing to occur prior to the date of this Release Agreement
involving Cotroneo's employment by HRB or any Affiliate, including, without
limitation, Cotroneo's hiring, compensation earned as of or before the date of
this Release Agreement, the termination of Cotroneo's responsibilities as an
officer of Block and as a director and/or officer of HRB and each Affiliate,
Cotroneo's termination as an employee of HRB, other obligations of Block, HRB or
any Affiliate (except for those obligations expressly stated in this Release
Agreement, the post-termination provisions of the Employment Agreement or
applicable benefit plans), and further including, but not limited to, any claims
for race, sex or age discrimination under the Age Discrimination in Employment
Act, as amended ("ADEA"), Title VII of the Civil Rights Act of 1964, the 1991
amendments of such Civil Rights Act, the Americans with Disabilities Act, as
amended, and all other federal and state statutes and common law doctrines.

         2. Release by HRB.

         (a) Except as provided in Section 2(b) of this Release Agreement, HRB
for itself and for its present and past directors, officers, employees,
predecessors, successors, assigns and Affiliates hereby unconditionally releases
and forever discharges Cotroneo, his relations, assigns, heirs, legal
representatives, of and from any and all claims, demands, actions, causes of
action and suits of any kind whatsoever, whether under federal or state statute,
local regulation or at common law or which thereafter arise from any matter,
fact, circumstance, event, happening or thing whatsoever occurring or failing to
occur prior to the date of this

                                      B-1
<PAGE>

Release Agreement involving Cotroneo's employment by HRB or any Affiliate, and
the performance of his responsibilities under the Employment Agreement.

         (b) The release described in Section 2(a) of this Release Agreement
does not include a release of (i) Cotroneo's obligations under that certain
letter dated March 31, 2003, addressed to James H. Ingraham attached hereto as
Exhibit I, and (ii) any claims, demands, actions, causes of action and suits of
any kind whatsoever involving acts of fraud, or embezzlement, whether known or
unknown as of the date of this Release Agreement. The Company expressly
represents that it has no knowledge or belief at this time that Cotroneo engaged
in any such conduct.

         3. Consideration of Release of ADEA Claims. With regard to the
waiver/release of rights or claims under the ADEA, Cotroneo acknowledges and
understands that this is a legal document and that he is legally entitled to,
and has been offered, a period of twenty-one (21) days (the "Consideration
Period") to consider the waiver/release of such rights or claims under this
Release Agreement before signing it. After signing this Release Agreement,
Cotroneo may revoke the waiver/release of rights or claims under the ADEA by
giving written notice ("Revocation Notice") to Mark A. Ernst, 4400 Main Street,
Kansas City, Missouri 64111, within seven (7) days after the date of signing
(such seven (7) day period, the "Revocation Period" and such date of signing,
the "Signing Date"). For such revocation to be effective, the Revocation Notice
must be received no later than 5:00 p.m., Kansas City, Missouri time, on the
seventh (7th) day after the Signing Date. If Cotroneo provides the Revocation
Notice to HRB, this Release Agreement will be null, void and unenforceable by
either party, and HRB will have no obligation to make any payments or provide
any benefits to Cotroneo hereunder.

         4. Acknowledgements. COTRONEO ALSO ACKNOWLEDGES THAT HRB HAS ADVISED
HIM TO CONSULT WITH AN ATTORNEY PRIOR TO SIGNING THIS RELEASE AGREEMENT OR
BEFORE THE EXPIRATION OF THE REVOCATION PERIOD. COTRONEO SPECIFICALLY
ACKNOWLEDGES AND AGREES THAT EITHER THE FULL TWENTY-ONE (21) DAY CONSIDERATION
PERIOD HAS LAPSED OR HE HAS BEEN OFFERED SUCH TWENTY-ONE (21) DAY CONSIDERATION
PERIOD BUT HAS ELECTED TO WAIVE AND FOREGO ALL OF THE APPLICABLE DAYS WHICH HAVE
NOT YET LAPSED IN SUCH TWENTY-ONE (21) DAY CONSIDERATION PERIOD. COTRONEO
ACKNOWLEDGES AND AGREES THAT UPON SUCH CONSIDERATION HE HAS DECIDED TO WAIVE AND
RELEASE ANY CLAIMS HE MAY HAVE UNDER THE ADEA, PURSUANT TO THE TERMS OF THIS
RELEASE AGREEMENT.

         5. Compensation and Benefits. The parties agree that Cotroneo will
receive the compensation and benefits from HRB after the Termination Date
provided for in Sections 4 (a) and (if) of the Termination Agreement.

         6. Termination of Compensation and Benefits. The compensation and
benefits described in Section 4 of the Termination Agreement will cease and no
further compensation and benefits will be provided to Cotroneo under this
Release Agreement if Cotroneo knowingly violates any of his obligations under
Sections 2 and 6 of the Termination Agreement. If Cotroneo unknowingly violates
any of his obligations under Sections 2 and 6 of the Termination Agreement,
Cotroneo agrees to take such actions as are necessary to correct the
violation(s) once he is made aware of the violation(s).

         7. This Release Agreement shall not affect the rights and obligations
of the parties under the Termination Agreement.

                                      B-2
<PAGE>

         8. Successors and Assigns. This Release Agreement and each of its
provisions will be binding upon Cotroneo and the heirs, executors, successors,
and administrators of Cotroneo or his estate and property, and shall inure to
the benefit of HRB, Block and their successors and assigns. Cotroneo may not
assign or transfer to others the obligation to perform his duties hereunder.
Executed as a sealed instrument under, and to be governed by, construed and
enforced in accordance with, the laws of the State of Missouri.

-----------------------------------------
Frank J. Cotroneo

Dated:
       --------------

HRB Management, Inc.
a Missouri corporation

By:
    -------------------------------------
    Mark A. Ernst
    President and Chief Executive Officer

Dated:
       -------------

                                      B-3
<PAGE>

                                    EXHIBIT I

James H. Ingraham
Senior Vice President and General Counsel
H&R Block, Inc.
4400 Main Street
Kansas City, MO 64111

Re: Undertaking

Dear Mr. Ingraham:

I understand that the Board of Directors of H&R Block, Inc. (the "Company") has
determined to indemnify me, to the fullest extent permissible under Missouri law
and the Company's Bylaws, in connection with the recently-filed securities class
action naming me as a co-defendant, including White v. H&R Block, Inc. et al,
Smith v. H&R Block, Inc. et al, Rodney v. H&R Block, Inc., et al, McCormack v.
H&R Block, Inc. et al, and any other related case (collectively, the "RAL
Disclosure Litigation"). I also understand that the Company will pay, on my
behalf and as they accrue, all expenses incurred in defending the RAL Disclosure
Litigation prior to its final disposition.

I hereby undertake to repay such amounts advanced by the Company on my behalf
unless it shall ultimately be determined (whether by the Board of Directors or
otherwise) that I am entitled to be indemnified because I acted in good faith
and in a manner I reasonably believed to be in, or not opposed, to the best
interests of the Company.

Very truly yours,

/s/ FRANK J. COTRONEO
---------------------
Frank J. Cotroneo

Dated: 3/31/03
       -------

<PAGE>

                                    EXHIBIT C

OPTIONEE STATEMENT                                               H&R BLOCK. INC.

                           EXERCISABLE AS OF 9/3/2003

FRANK J. COTRONEO

<Table>
<Caption>
                                                        OPTIONS                 OPTIONS/DATE
 GRANT      EXPIRATION                GRANT           GRANTED OR       OPTION    TRANSFERRED    OPTIONS         OPTIONS
  DATE        DATE      PLAN ID       TYPE          TRANSFERRED TO      PRICE        OUT      OUTSTANDING     EXERCISABLE
 -----      ----------  -------       ----          --------------     ------   ------------  -----------     -----------

<S>         <C>         <C>         <C>             <C>                <C>      <C>           <C>          <C>
2/21/2000   2/21/2010    84 1       Incentive            14,856        $20.1875                 14,856      14,856    CURRENT
2/21/2000   2/21/2010    84 1       Non-Qualified        25,144        $20.1875                 25,144       25,14    CURRENT
6/30/2000   6/30/2010    84 1       Incentive                 1        $16.1875                      1           1    CURRENT
6/30/2000   6/30/2010    84 1       Non-Qualified        69,999        $16.1875                 23,333      23,333    CURRENT
6/30/2001   6/30/2011    84 1       Incentive             3,098        $32.2750                  3,098           0    CURRENT
                                                                                                             3,098 on 06/30/2006
6/30/2001   6/30/2011    84 1       Non-Qualified        66,902        $32.2750                 43,570           0    CURRENT
                                                                                                            23,334 on 06/30/2005
                                                                                                            20,236 on 06/30/2006
6/30/2002   6/30/2012    84 1       Incentive             4,332        $46.1500                  4,332           0    CURRENT
                                                                                                             2,166 on 06/30/2004
                                                                                                             2,166 on 06/30/2005
6/30/2002   6/30/2012    84 1       Non-Qualified        50,668        $46.1500                 50,638           0    CURRENT
                                                                                                            16,171 on 06/30/2004
                                                                                                            16,165 on 06/30/2005
                                                                                                            18,332 on 06/30/2006
6/30/2003   6/30/2013    84 1       Non-Qualified        45,000        $43.2500                 45,000           0    CURRENT
                                                                                                            15,000 on 06/30/2004
                                                                                                            15,000 on 06/30/2005
                                                                                                            16,000 on 06/30/2008

Optionee Totals                                         280,000                                210,002      63,334
</Table>

<PAGE>

                                    EXHIBIT D

                                REFERENCE LETTER

To Whom It May Concern:

         Frank Cotroneo was Senior Vice-President and Chief Financial Officer of
H&R Block from February 21, 2000 to October 31, 2003. During his tenure, Mr.
Cotroneo was an integral member of our management team. Frank left to pursue
other opportunities, and his departure was amicable. We wish him well.

                                         Sincerely yours,

                                         Mark A. Ernst

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