Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported): October 7, 2009
WSI Industries, Inc.
(Exact name of Registrant as Specified in its Charter)
Minnesota
(State Or Other Jurisdiction Of Incorporation)
     
000-00619   41-0691607
     
(Commission File Number)   (I.R.S. Employer Identification No.)
     
213 Chelsea Road
Monticello, MN
  55362
     
(Address Of Principal Executive Offices)   (Zip Code)
(763) 295-9202
Registrant’s Telephone Number, Including Area Code
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions ( see General Instruction A.2. below):
      o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
      o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
      o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
      o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 
 

 


TABLE OF CONTENTS

Item 5.02 Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers; Compensatory Arrangements of Certain Officers
Item 9.01 Financial Statements And Exhibits
SIGNATURE
EX-10.1
EX-10.2
EX-10.3
EX-10.4
EX-10.5
EX-99.1


Table of Contents

Items under Sections 1 through 4 and 6 through 8 are not applicable and therefore omitted.
Item 5.02   Departure of Directors or Principal Officers; Election of Directors;
Appointment of Principal Officers; Compensatory Arrangements of Certain Officers .
     On October 7, 2009, Benjamin Rashleger accepted an employment offer letter (the “Offer Letter”) from WSI Industries, Inc. (the “Company”) pursuant to which Mr. Rashleger will serve as the Company’s President and Chief Operating Officer beginning October 12, 2009. A copy of the Offer Letter is attached hereto as Exhibit 10.1.
     Mr. Rashleger, age 34, served as President and Chief Financial Officer of Milltronics Manufacturing Company, a privately held machine tool manufacturer in Waconia, Minnesota from 2006 until June 2007. From 2002 to 2006, Mr. Rashleger served Milltronics Manufacturing as Vice President. In June 2007, Milltronics Manufacturing Company was acquired by Liberty Diversified Industries and Mr. Rashleger continued on as the Director of Operations of Milltronics Manufacturing as a Liberty Diversified Industries company from June 2007 until December 2008. From January 2009 until his appointment as the Company’s President and Chief Operating Officer, Mr. Rashleger was on sabbatical and exploring opportunities. Mr. Rashleger earned a Bachelor of Science degree in Business from the Carlson School of Management at the University of Minnesota.
     Under the terms of the Offer Letter, Mr. Rashleger will receive annual base salary of $150,000, payable according to the Company’s regular payroll practices. Mr. Rashleger will also participate in the Company’s incentive program for executive officers and will be entitled to bonus of 70% of his base salary based upon achievement of goals relating to new business and profitability for the fiscal year to be jointly determined and subject to approval by the Company’s Board.
     Pursuant to the Offer Letter, Mr. Rashleger was granted a non-qualified stock option on October 12, 2009 to purchase 10,000 shares of the Company’s common stock under the Company’s 2005 Stock Plan, as amended (the “Plan”). The option has an exercise price equal to the fair market value of the Company’s common stock as of the grant date, as determined under the Plan. The option vests with respect to one-third of the shares underlying the option on each of the 6 month, 18 month and 30 month anniversaries of the date of grant and has a term of ten years.
     On October 12, 2009, Mr. Rashleger entered into an Employment (Change In Control) Agreement, attached hereto as Exhibit 10.2 (the “Rashleger Agreement”), that is effective until October 12, 2010 with automatic one-year renewals thereafter unless the Company provides at least 60 days’ prior notice. However, if a Change of Control occurs, the Rashleger Agreement will remain in effect for a period of twelve months from the date of the Change of Control. Under the Rashleger Agreement, if a Change in Control occurs and Mr. Rashleger’s employment is terminated by the Company other than for Cause or Disability or by Mr. Rashleger for Good Reason, the Company will pay Mr. Rashleger a severance payment in cash in a single sum within sixty days of the date of termination equal to 2.99 times the average of the annual compensation paid to Mr. Rashleger by the Company for the five calendar years (or such lesser number of complete calendar years or portions thereof calculated on an annualized basis) in the case of an Unapproved Change in Control and, in the case of an Approved Change in Control, 1.0 times the annual compensation for such period. Mr. Rashleger will also be entitled to participate in life, disability, accident and health insurance benefits for a period of twelve months following the Termination Date in the event of an Approved Change of Control and for thirty-six months following the Termination Date in the event of an Unapproved Change in Control, or the Company will reimburse Mr. Rashleger for the cost of comparable coverage. The severance payment is subject to reduction such that no portion of the payment, together with other benefits received in a change of control, would constitute a “parachute payment” or would be non-deductible solely by reason of Section 280G of the Internal Revenue Code of 1986, as amended. Capitalized terms used in this paragraph have the meaning ascribed to them in the Rashleger Agreement. Except with respect to this letter agreement, Mr. Rashleger’s employment with the Company is “at will.” On October 12, 2009, Mr. Rashleger also entered into a form of Restrictive

 


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Covenant Agreement attached hereto as Exhibit 10.3 governing non-disclosure of confidential information, non-competition and non-solicitation.
     In connection with the hiring of Mr. Rashleger, the Company entered into an Employment Agreement dated October 7, 2009 with Michael J. Pudil, the Company’s Chief Executive Officer (the “Pudil Agreement”). The Pudil Agreement is attached hereto as Exhibit 10.4. The Pudil Agreement has a term beginning on October 7, 2009 and ending December 31, 2011. Pursuant to the Pudil Agreement, Mr. Pudil will be employed as the Company’s Chief Executive Officer at a base salary of $222,120, which would be reduced to $100,000 during any period of the term of the Pudil Agreement after December 31, 2009 in which Mr. Pudil’s successor continues to serve as President. Mr. Pudil will be entitled to insurance, vacation, profit sharing, and other benefits the Company makes available. In the event of termination of Mr. Pudil’s employment by the Company without Cause or by Mr. Pudil for Good Reason or if Mr. Pudil dies or becomes Disabled or if Mr. Pudil continues to be employed by the Company until the Pudil Agreement terminates on December 31, 2011, the Company will pay all obligations accrued through such date of termination and will also make a lump sum severance payment to Mr. Pudil equal to $335,000 on a date that is six months and one day after the effective date of termination of employment (except in death or Disability, payments shall be made no later than 30 days after the date of death or determination of Disability). Additionally, except in the case of death, the Company will continue to be responsible for the employer portion of monthly premiums for group health, dental, life insurance and special medical insurance for an eighteen month period following the termination. Further, all outstanding stock options will fully vest and Mr. Pudil will have the right to exercise all such vested stock options for an eighteen month period following the termination, except that no stock option will be exercisable after its original expiration date. All restrictions on outstanding restricted stock awards will also lapse on the last day of employment. In the event of termination of Mr. Pudil’s employment by the Company with Cause or by Mr. Pudil without Good Reason, the Company’s only obligation to Mr. Pudil is to pay any base salary earned but not yet paid, reimburse Mr. Pudil for expenses incurred and pay or provide any benefits that are vested or that Mr. Pudil is otherwise entitled to receive under the Company’s existing programs. Capitalized terms used in this paragraph have the meaning ascribed to them in the Pudil Agreement.
     On October 7, 2009, Mr. Pudil also entered into the form of Restrictive Covenant Agreement attached hereto as Exhibit 10.3.
     In connection with the hiring of Mr. Rashleger, the Company also entered into Severance Letter Agreement dated October 7, 2009 with Paul D. Sheely, the Company’s Chief Financial Officer (the “Sheely Agreement”). The Sheely Agreement is attached hereto as Exhibit 10.5. Under the Sheely Agreement, if Mr. Sheely’s employment is terminated without Cause, the Company will continue to pay Mr. Sheely his base salary in accordance with the Company’s regular payroll practices for a period of twelve months or until he has secured other employment first, whichever occurs first, and the Company will pay a portion of the COBRA premium until the earlier of twelve months or the date COBRA coverage otherwise terminates. If Mr. Sheely’s employment terminates because of his resignation Payment of these Capitalized terms used in this paragraph have the meaning ascribed to them in the Sheely Agreement.
     On October 7, 2009, Mr. Sheely also entered into the form of Restrictive Covenant Agreement attached hereto as Exhibit 10.3.
     The foregoing summaries of the Offer Letter, the Rashleger Agreement, the Pudil Agreement and the Sheely Agreement do not purport to be complete and are subject to and qualified in their entirety by reference to such agreements, which are attached hereto as Exhibits 10.1 through 10.5 to this Form 8-K and are incorporated by reference into this Item 5.02.
     On October 12, 2009, the Company issued a press release regarding Mr. Rashleger’s appointment as President and Chief Operating Officer, which is attached hereto as Exhibit 99.1.

 


Table of Contents

Item 9.01   Financial Statements And Exhibits.
     
Exhibit No.   Description
10.1  
Employment Offer Letter dated October 5, 2009 by WSI Industries, Inc. to Benjamin Rashleger.
   
 
10.2  
Employment (Change In Control) Agreement dated October 12, 2009 by and between WSI Industries, Inc. and Benjamin Rashleger.
   
 
10.3  
Form of Restrictive Covenant Agreement by and between WSI Industries, Inc. and Michael J. Pudil, Paul D. Sheely and Benjamin Rashleger.
   
 
10.4  
Employment Agreement dated as of October 7, 2009 by and between WSI Industries, Inc. and Michael J. Pudil.
   
 
10.5  
Severance Letter Agreement dated October 7, 2009 by and between WSI Industries, Inc. and Paul D. Sheely.
   
 
99.1  
Press Release issued on October 12, 2009.

 


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SIGNATURE
     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
         
  WSI INDUSTRIES, INC.
 
 
  By:   /s/ Michael J. Pudil    
    Michael J. Pudil   
    Chief Executive Officer   
 
Date: October 12, 2009

 

EXHIBIT 10.1
[WSI INDUSTRIES LETTERHEAD]
October 5, 2009
Mr. Benjamin Rashleger
[address]
[address]
Dear Benjamin,
This letter is to confirm WSI Industries employment offer. Reporting directly to me, the position is President & Chief Operating Officer.
Your starting annual base salary will be $150,000, paid weekly. You will have eligibility to participate in an incentive program for up to 70% of your annual base salary. Specific objectives relating to new business and profitability for this fiscal year will be determined jointly and subject to WSI Board approval.
The benefits package will be per the standard employee plan plus a special executive medical plan. In addition, you will enter into an Employment ( Change in Control) Agreement and on the day of your start date, you will be issued 10,000 Non Qualified Stock Options at a price equal to the average price on that day and containing vesting and other terms consistent with our standard awards. An attached Restrictive Covenant Agreement, signed by you will be required.
Start date would be Monday, October 12, 2009.
Benjamin, I am very pleased with extending this offer and look forward to you joining WSI Industries. I am confident that you will be an excellent asset to WSI and will help us grow profitably with our current and future customers. I look forward to your contributions.
Sincerely,
         
/s/ Michael J. Pudil
  Accepted and Agreed to:    
 
       
Michael J. Pudil
       
Chief Executive Officer
  /s/ Benjamin Rashleger
 
   
WSI Industries
  Benjamin Rashleger    
 
  Date: October 7, 2009
 
   

EXHIBIT 10.2
EMPLOYMENT (CHANGE IN CONTROL) AGREEMENT
     AGREEMENT made effective as of this 12 day of October, 2009 by and between WSI Industries, Inc., a Minnesota corporation with its principal offices at Wayzata, Minnesota (“WSI”) and Benjamin Rashleger (the “Executive”).
     WHEREAS, WSI considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of WSI and its shareholders; and
     WHEREAS, the Executive has made and is expected to make, due to Executive’s intimate knowledge of the business and affairs of WSI, its policies, methods, personnel and problems, a significant contribution to the profitability, growth and financial strength of WSI; and
     WHEREAS, WSI, as a publicly held corporation, recognizes that the possibility of a Change in Control may exist and that such possibility and the uncertainty and questions which it may raise among management, may result in the departure or distraction of the Executive in the performance of the Executive’s duties to the detriment of WSI and its shareholders; and
     WHEREAS, Executive is willing to remain in the employ of WSI upon the understanding that WSI will provide income security if the Executive’s employment is terminated under certain terms and conditions; and
     WHEREAS, it is in the best interests of WSI and its stockholders to reinforce and encourage the continued attention and dedication of management personnel, including Executive, to their assigned duties without distraction and to ensure the continued availability to WSI of the Executive in the event of a Change in Control.
     THEREFORE, in consideration of the foregoing and other respective covenants and agreements of the parties herein contained, the parties hereto agree as follows:
     1.  Term of Agreement . This Agreement shall commence on the date hereof and shall continue in effect until October 12, 2010. This Agreement shall automatically renew for successive one-year periods unless WSI notifies the Executive of termination of the Agreement at least sixty (60) days prior to the end of the initial term or any renewal term. Notwithstanding the preceding sentence, if a Change in Control occurs, this Agreement shall continue in effect for a period of 12 months from the date of the occurrence of a Change in Control. Notwithstanding anything herein to the contrary, the Executive’s employment shall be at all times at the will of WSI, and nothing in this Agreement shall prohibit or limit the right of WSI or Executive, prior to a Change in Control, to terminate the employment of Executive for any reason or for no reason.
     2.  Change in Control . No benefits shall be payable hereunder unless there shall have been a Change in Control, as set forth below.

 


 

     (a) For purposes of this Agreement, a “Change in Control” of WSI shall be deemed to occur when and if any of the following occur:
     (i) any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes a “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of WSI representing 50% or more of the combined voting power of WSI’s then outstanding securities;
     (ii) there ceases to be a majority of the Board of Directors comprised of: (A) individuals who on the date hereof constituted the Board of WSI, and (B) any new director (other than a director whose initial assumption of office is in connection with an actual or threatened contest, including but not limited to a proxy or consent solicitation, relating to the election of directors of WSI or a settlement of such contest or consent solicitation) who subsequently was elected or nominated for election by a majority of the directors who held such office immediately prior to a Change in Control (the individuals designated in (A) and (B) shall be referred to as the “Incumbent Directors”); or
     (iii) WSI disposes of at least 75% of its assets, other than to an entity owned 50% or greater by WSI or any of its subsidiaries.
     (b) A Change in Control which arises from a transaction or series of transactions which are not authorized, recommended or approved by formal action taken by a majority of the Incumbent Directors shall be referred to as an “Unapproved Change in Control.” A Change in Control which has been authorized, recommended or approved by a majority of the Incumbent Directors shall be referred to as an “Approved Change in Control.”
     3.  Termination Following Change in Control . If a Change in Control shall have occurred during the term of this Agreement and Executive’s employment is thereafter terminated, Executive shall be entitled to the benefits provided in subsection 4(d) unless such termination is (A) because of Executive’s Death or Retirement, (B) by WSI for Cause or Disability, or (C) by Executive other than for Good Reason.
     (a) Disability; Retirement . If, as a result of incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of Executive’s duties with WSI for six consecutive months, and within 30 days after written Notice of Termination is given the Executive shall not have returned to the full-time performance of the Executive’s duties, WSI may terminate Executive’s employment for “Disability”. Any question as to the existence of Executive’s Disability upon which Executive and WSI cannot agree shall be determined by a qualified independent physician selected by Executive (or, if the Executive is unable to make such selection, it shall be made by any adult member of the Executive’s immediate family), and approved

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by WSI. The determination of such physician made in writing to WSI and to Executive shall be final and conclusive for all purposes of this Agreement. Termination by Executive of Executive’s employment based on “Retirement” shall mean retirement at or after the date the Executive has attained age 65.
     (b) Cause . Termination by WSI of Executive’s employment for “Cause” shall mean: (i) the willful and continued failure of Executive to perform his essential duties; (ii) the willful engaging by Executive in illegal conduct, or (iii) willful misconduct materially injurious to WSI, which, in the case of clause (i) and (iii), the Executive has not cured, in the sole opinion of the Board, determined in good faith, within 10 days of receipt of the Notice of Termination. An act of Executive shall not be deemed “willful” unless done or omitted to be done by Executive not in good faith and without reasonable belief that the act or omission was in WSI’s best interests.
     (c) Good Reason . Executive shall be entitled to terminate his employment for Good Reason. For purposes of this Agreement, “Good Reason” shall mean, without Executive’s express written consent, any of the following:
          (i) the assignment to Executive of any duties inconsistent with Executive’s status or position with WSI, or a substantial reduction in the nature or status of Executive’s responsibilities from those in effect immediately prior to the Change in Control;
          (ii) a reduction by WSI in Executive’s annual base salary in effect immediately prior to a Change in Control;
          (iii) the relocation of Executive’s principal executive offices to a location more than fifty miles from Executive’s principal office prior to the Change in Control, except for required travel on WSI’s business to an extent substantially consistent with Executive’s prior business travel obligations;
          (iv) the failure by WSI to continue to provide Executive with benefits substantially similar to those enjoyed by Executive under any of WSI’s pension, life insurance, medical, health and accident, disability, deferred compensation, incentive awards, incentive stock options, or savings plans in which Executive was participating at the time of the Change in Control, the taking of any action by WSI which would directly or indirectly materially reduce any of such benefits or deprive Executive of any material fringe benefit enjoyed at the time of the Change in Control, or the failure by WSI to provide Executive with the number of paid vacation days to which Executive is entitled at the time of the Change in Control, provided, however, that WSI may amend any such plan or programs as long as such amendments do not reduce any benefits to which Executive would be entitled upon termination;

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     (v) the failure of WSI to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 7; or
     (vi) any purported termination of Executive’s employment which is not made pursuant to a Notice of Termination satisfying the requirements of subsection (e) below; for purposes of this Agreement, no such purported termination shall be effective.
     (d) Voluntary Termination Deemed Good Reason . If an Unapproved Change in Control occurs, Executive may voluntarily terminate his employment for any reason during the period commencing on the 91st day following a Change in Control and ending on the 180th day following a Change in Control. Any such termination shall be deemed “Good Reason” for all purposes of this Agreement.
     (e) Notice of Termination . Any purported termination of Executive’s employment by WSI or by Executive shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 8. For purposes of this Agreement, a “Notice of Termination” shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth the facts and circumstances claimed to provide a basis for termination of Executive’s employment.
     (f) Date of Termination . For purposes of this Agreement, “Date of Termination” shall mean:
     (i) if Executive’s employment is terminated for Disability, 30 days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive’s duties during such 30 day period); and
     (ii) if Executive’s employment is terminated pursuant to subsections (b), (c) or (d) above or for any other reason (other than Disability), the date specified in the Notice of Termination (which, in the case of a termination pursuant to subsection (b) above shall not be less than 10 days, and in the case of a termination pursuant to subsection (c) or (d) above shall not be less than 10 nor more than 30 days, respectively, from the date such Notice of Termination is given).
     (g) Dispute of Termination . If, within 10 days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party in good faith that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, or by a final judgement, order or decree of a court of competent jurisdiction in accordance with subsection 11(a) (which is not appealable or

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the time for appeal therefrom having expired and no appeal having been perfected); provided, that the date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, WSI shall continue to pay Executive full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, base salary) and continue Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with this subsection. Amounts paid under this subsection are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts under this Agreement.
     4.  Compensation Upon Termination or During Disability . Following a Change in Control of WSI, as defined in subsection 2(a), upon termination of Executive’s employment or during a period of Disability, Executive shall be entitled to the following benefits:
     (a) During any period that Executive fails to perform full-time duties with WSI as a result of a Disability, WSI shall pay Executive the base salary of the Executive at the rate in effect at the commencement of any such period, until such time as the Executive is determined to be eligible for long term disability benefits in accordance with WSI’s insurance programs then in effect.
     (b) If Executive’s employment shall be terminated by WSI for Cause or by Executive other than for Good Reason or Retirement, WSI shall pay to Executive his full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and WSI shall have no further obligation to Executive under this Agreement.
     (c) If Executive’s employment shall be terminated by WSI for Disability or by Executive for Retirement, or by reason of Death, WSI shall immediately commence payment to the Executive (or Executive’s designated beneficiaries or estate, if no beneficiary is designated) any and all benefits to which the Executive is entitled under WSI’s retirement and insurance programs then in effect.
     (d) If Executive’s employment by WSI shall be terminated (A) by WSI other than for Cause or Disability or (B) by Executive for Good Reason, then Executive shall be entitled to the benefits provided below:
     (i) WSI shall pay Executive the Executive’s full base salary through the Date of Termination at the rate in effect at the time the Notice of Termination is given;
     (ii) In lieu of any further salary payments for periods subsequent to the Date of Termination, WSI shall pay a severance payment (the “Severance

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Payment”) equal to the amount described in (A) or (B) below, whichever is applicable: (A) if an Unapproved Change in Control occurs, 2.99 times the average of the annual Compensation (as defined below) paid to Executive by WSI (or any corporation (“Affiliate”) affiliated with WSI within the meaning of Section 1504 of the Internal Revenue Code of 1986, as amended (the “Code”)) for the five calendar years (or, if Executive has been employed by WSI for less than five years, the number of complete calendar years of employment or portions thereof calculated on an annualized basis) (the “Base Period”) preceding the earlier of the calendar year in which a Change in Control of WSI occurred or the calendar year of the Date of Termination; or (B) if an Approved Change in Control occurs, 1.0 times the average of the annual Compensation (as defined below) for the Base Period. Such average (including the effect of bonuses paid in the Base Period) shall be determined in accordance with the temporary or final regulations promulgated under Section 280G(e) of the Code. For purposes of this Section 4, “Compensation” payable to Executive by WSI (or an Affiliate) shall mean every type and form of compensation includable in Executive’s gross income for federal income tax purposes for each year, shall include any voluntary salary deferral contributions to WSI’s cash or deferred arrangement under the WSI profit sharing plan (the 401(k) contributions) and the WSI cafeteria plan, but shall exclude taxable compensation recognized as the result of the exercise of stock options or sale of the stocks acquired or any payments actually or constructively received with respect to a plan of deferred compensation between WSI and Executive. The Severance Payment shall be made within 60 days after the Date of Termination, or such earlier date as any required rescission period in respect of the release given by Executive under Section 5 has expired.
     (iii) For the period of (A) 12 months following the Termination Date in the event of an Approved Change in Control or (B) 36 months following the Termination Date in the event of an Unapproved Change in Control, Executive shall be entitled to continue participation in the life, disability, accident and health insurance benefit plans of WSI substantially similar to those which the Executive is receiving or entitled to receive immediately prior to the Notice of Termination. WSI and Executive shall share the cost associated with such coverage as if Executive were still actively employed by WSI. If Executive cannot be covered under any of WSI’s group plans or policies, WSI shall reimburse Executive for his full cost of obtaining comparable alternative group or individual coverage elsewhere, less any contribution that Executive would have been required to make under WSI’s group plans or policies. Benefits otherwise receivable by Executive pursuant to this paragraph (iii) shall be reduced to the extent comparable benefits are actually received by Executive during such period, and any such benefits actually received by Executive shall be reported to WSI.
     (iv) Notwithstanding the foregoing, the Severance Payment shall be reduced to that maximum amount permitted such that no portion of the Severance

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Payment, together with any other payment or the value of any benefit received or to be received by Executive (whether payable pursuant to the terms of this Agreement, any other plan, agreement or arrangement with WSI or an Affiliate) that is contingent upon a change in control of WSI as that term is defined in Section 280G of the Code would constitute a “parachute payment” within the meaning of Section 280G(b)(2) of the Code or would be nondeductible solely by reason of the application of such Section 280G. In determining the amount of the Severance Payment, in full or as partially reduced as the case may be, payable pursuant to this Section 4(d), the opinion of tax counsel selected by WSI and acceptable to Executive with respect to all issues arising in connection with the application of Section 280G of the Code to such payments and benefits shall be final and binding on the parties. The Executive may elect to have the benefit continuation under Section 4(d)(iii) reduced or eliminated prior to any reduction of the Severance Payment.
     (v) If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of Executive and WSI in applying the terms of this Subsection 4(d), any portion of the Severance Payment constitutes a “parachute payments” and would result in part or all of such Severance Payment being nondeductible by WSI or its Affiliates by reason of Section 280G of the Code, then Executive shall repay to WSI upon demand an amount equal to the sum of: (1) that portion of the Severance Payment in excess of the maximum amount that could have been paid to or for the Executive’s benefit without any portion constituting a “parachute payment” and being nondeductible by reason of section 280G of the Code; and (2) interest on the amount set forth in clause (1) of this sentence at the applicable Federal rate (as defined in section 1274(d) of the Code) from the date of Executive’s receipt of such excess until the date of such payment.
     (vi) The Severance Payment shall be in lieu of and offset the amount of any payment or other benefits to which the Executive may be entitled to in connection with the termination of employment pursuant to the provisions of WSI’s Severance Pay Plan, as amended from time to time, or any successor to such policy.
     (e) Executive shall not be required to mitigate the amount of any payment provided for in this Section 4 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 4 be reduced by any compensation earned by Executive as the result of employment by another employer or by retirement benefits after the Date of Termination, or otherwise except as specifically provided in this Section 4.
     (f) In addition to all other amounts payable to Executive under this Section 4, Executive shall be entitled to receive all benefits payable to the Executive under the WSI,

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Inc. Employee Savings Plan and any other plan or agreement relating to retirement benefits or otherwise generally applicable to executive employees.
     5.  General Release . Executive agrees that the amounts payable to Executive under Section 4 shall be contingent upon the execution by Executive of a release agreement with WSI, which release agreement shall include language releasing and holding WSI and its affiliates, officers, directors, shareholders, employees, agents and insurers harmless from any and all claims, comply with all applicable laws and contain other provisions standard in such agreements.
     6.  Funding of Payments . In order to assure the performance by WSI or its successor of its obligations under this Agreement, WSI shall, no later than immediately prior to the closing of the transaction that constitutes an Unapproved Change in Control, deposit in a so-called “rabbi trust” or similar escrow arrangement an amount equal to the maximum payment that will be due the Executive under the terms hereof. Under a written trust instrument, the Trustee shall be instructed to pay to the Executive (or the Executive’s legal representative, as the case may be) the amount to which the Executive shall be entitled under the terms hereof, and the balance, if any, of the trust not so paid or reserved for payment shall be repaid to WSI. If and to the extent there are not amounts in trust sufficient to pay Executive under this Agreement, WSI shall remain liable for any and all payments due to Executive. In accordance with the terms of such trust, at all times during the term of this Agreement Executive shall have no rights, other than as an unsecured general creditor of WSI, to any amounts held in trust and all trust assets shall be general assets of WSI and subject to the claims of creditors of WSI. With respect to an Approved Change in Control, WSI’s obligations in this Section 6 shall not be mandatory but rather shall be permissive.
     7.  Successors; Binding Agreement .
     (a) WSI will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of WSI to expressly assume and agree to perform this Agreement in the same manner and to the same extent that WSI would be required to perform it if no such succession had taken place. Failure of WSI to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Executive to compensation from WSI in the same amount and on the same terms as he would be entitled hereunder if he terminated his employment for Good Reason following a Change in Control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination.
     (b) This Agreement shall inure to the benefit of and be enforceable by Executive’s personal or legal representatives, successors, heirs, and designated beneficiaries. If executive should die while any amount would still be payable to Executive hereunder if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement

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to the Executive’s designated beneficiaries, or, if there is no such designated beneficiary, to the Executive’s estate.
     8.  Notice . For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered or certified mail, return receipt requested, postage pre-paid, addressed to the last known residence address of the Executive or in the case of WSI, to its principal office to the attention of each of the then directors of WSI with a copy to its Secretary, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt.
     9.  Miscellaneous . No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the parties. No waiver by either party thereto at anytime of any breach by the other party to this Agreement of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or similar time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Minnesota.
     10.  Validity . The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceablity of any other provision of this Agreement, which shall remain in full force and effect.
     11.  Arbitration and Award of Attorneys’ Fees .
     (a) Any dispute arising between the parties relating to this Agreement shall be resolved by binding arbitration held in the City of Minneapolis pursuant to the Rules of the American Arbitration Association, except as hereinafter expressly modified. If the disputing and responding parties are unable to agree upon a resolution within forty-five business days after the responding party’s receipt of written notice from the disputing party setting forth the nature of the dispute, within the following ten business days the disputing and responding parties shall select a mutually acceptable single arbitrator to resolve the dispute or, if the parties fail or are unable to do so, each shall within the following ten business days select a single arbitrator, and the two so selected shall select a third arbitrator within the following ten business days. Such single arbitrator or, as the case may be, panel of three arbitrators acting by majority decision, shall resolve the dispute within sixty days after the date such arbitrator, or the last of them so selected, is selected, or as soon thereafter as practicable. If either party refuses or fails to select an arbitrator within the time therefor, the other party may do so on such refusing or failing party’s behalf. The arbitrators shall have no power to award any punitive or exemplary damages but may construe or interpret but shall not ignore or vary the terms of this Agreement and shall be bound by controlling law. The parties acknowledge the

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Executive’s failure to comply with any confidentiality, non-solicit, and non-compete provisions of any agreement to which the Executive is bound will cause immediate and irreparable injury to WSI and that therefore the arbitrators, or a court of competent jurisdiction if an arbitration panel cannot be immediately convened, will be empowered to provide injunctive relief, including temporary or preliminary relief, to restrain any such failure to comply. The arbitration award or other resolution may be entered as a judgment at the request of the prevailing party by any court of competent jurisdiction in Minnesota or elsewhere.
     (b) In the event WSI fails to pay Executive any amounts owing to Executive under this Agreement or to provide Executive any benefits to which Executive is ultimately determined, by settlement, mediation, arbitration, or by any court or other decision making body with jurisdiction, to be entitled to under this Agreement, WSI shall pay the legal expenses (including reasonable attorneys’ fees, court costs and other out-of-pocket expenses), incurred by Executive to enforce his rights under this Agreement and collect or obtain such amounts or benefits.
     12.  Confidential Information . Executive will not while this Agreement is in effect or after its expiration or termination, use, other than in connection with Executive’s employment with WSI, or disclose any confidential information to any person not employed by WSI or not authorized by WSI to receive such information without the prior written consent of WSI. Executive will use reasonable and prudent care to safeguard, protect and prevent the unauthorized disclosure of confidential information. The obligations contained in this Section 12 will survive for as long as WSI in its sole judgment considers the information to be confidential information.
     13.  Disclosure and Assignment .
     (a) Disclosure . Executive will disclose promptly in writing to WSI all inventions, improvements, discoveries and writings and other works of authorship (“works”) which are conceived, made, discovered or written jointly or singly on WSI time or on Executive’s time, providing the invention, improvement, discovery, writing or other work is capable of being used by WSI in the normal course of business, and all such inventions, improvements, discoveries, writings and works are hereby assigned to, and belong solely and exclusively to WSI.
     (b) Assignment . Executive will sign and execute all instruments of assignment and other papers to evidence divestiture of the entire right, title, and interest in such inventions, improvements, discoveries, writings, or works in WSI, and will do all acts and sign all papers that WSI may reasonably request, relating to applications for patents, to patents, to copyrights, and to the enforcement and protection thereof. If such acts are requested and performed when Executive is not a WSI employee, WSI will pay a fee, determined by WSI, covering authorized time and expenses of Executive but no others.

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     (c) Limitations . Notwithstanding anything in this Section 13 to the contrary, Executive is hereby given NOTICE that the assignment and statement of WSI ownership does not apply to any INVENTION for which no equipment, supplies, facility or trade secret information of WSI was used and which was developed entirely on Executive’s own time, and (1) which does not relate (i) directly to the business of WSI or (ii) to WSI’s actual or demonstrably anticipated research or development, or (2) which does not result from any work performed by Executive for WSI.
     (d) Survival of Obligations .
     (i) The obligations of this Section 13 survive the expiration or termination of this Agreement.
     (ii) This Agreement, or any termination hereof, has no effect on any other Employee Agreement previously executed by Executive which remains in full force and effect. To the extent there are any conflicts between this Agreement and such other Agreement, this Agreement prevails.
     (iii) Upon termination of employment, Executive will not take or retain, and will return to WSI all WSI property of any nature or kind.
     14.  Other Agreements . This Agreement constitutes our entire agreement and supersedes all prior discussions, understandings and agreements with respect to a change in control of WSI. This Agreement contains the entire understanding of the parties, except the Letter Agreeement dated the date of this Agreement with respect to severance payments prior to a Change in Control (the “Letter Agreement”), which shall remain in effect according to its terms and which, in the event of conflict with this Agreement, the terms of this Agreement shall control. There shall be no duplication of benefits on Executive’s behalf in this Agreement and the Letter Agreement in the event of the termination of Executive’s employment following a Change in Control.
         
  WSI INDUSTRIES, INC.
 
 
  By /s/ Michael J. Pudil    
    Michael J. Pudil   
    Chief Executive Officer   
 
  EXECUTIVE
 
 
  /s/ Benjamin Rashleger    
  Benjamin Rashleger   
     
 

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EXHIBIT 10.3
RESTRICTIVE COVENANT AGREEMENT
     THIS RESTRICTIVE COVENANT AGREEMENT (“Agreement”) is entered into as of [                                           ], by and between [                                           ] (“Employee”) and WSI Industries, Inc., (the “Company” or the “Employer”).
     IN CONSIDERATION of employment, and the Employment (Change in Control) Agreement and the other benefits offered Employee dated this date between Employee and Employer, to which Employee was not otherwise entitled to, the Company and Employee agree as follows:
     1.  Confidential Information .
          1.1 “Confidential Information” Defined . “Confidential Information” means information not generally known and proprietary to the Company or to a third party for whom the Company is performing work, including, without limitation, information concerning any patents or trade secrets, confidential or secret designs, processes, formulae, source codes, plans, devices or material, research and development, proprietary software, analysis, techniques, materials or designs (whether or not patented or patentable), directly or indirectly useful in any aspect of the business of the Company, any vendor names, customer and supplier lists, databases, management systems and sales and marketing plans, accounting and financial reports, evaluations, statements, audits of the Company or other affiliated entity, any confidential secret development or research work of the Company, or any other confidential information or proprietary aspects of the business of the Company. All information which Employee acquires or becomes acquainted with during Employee’s employment by the Company (including employment by an affiliated company), whether developed by Employee or by others, which Employee has a reasonable basis to believe to be Confidential Information, or which is treated by the Company as being Confidential Information, shall be presumed to be Confidential Information.
          1.2 Disclosures and Use by Employee. Employee will not, during or at any time after the term of employment under this Agreement, divulge, disclose or communicate to any person or entity, or use for Employee’s benefit or for the benefit of any third party, in any manner whatsoever, whether directly or indirectly, any information concerning any matters affecting or relating to the business of Employer, including any of its customers, the prices it obtains or has obtained from the sale of, or at which it sells or has sold, its products, or any other information concerning its business, its manner of operation, its plans, processes, specifications, merchandising techniques, or other data. Employee understands that such matters and information are important, material, and confidential and are necessary to the effective and successful conduct of Employer’s business and goodwill, and that any breach of the terms of this paragraph shall be a material breach of this agreement.
          1.3 Scope of Obligation . The foregoing obligations of confidentiality shall not apply to any knowledge or information which is now published or which subsequently

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becomes generally publicly known in the form in which it was obtained from the Company, other than as a direct or indirect result of the breach of this Agreement by Employee.
          1.4 Ownership Rights: Confidentiality. Employee shall not acquire any rights hereunder or during employment to any documents, records, tangible property, goodwill, trade secrets, customer lists, proprietary interests, Confidential Information, or other property of Employer, whether tangible or intangible. All such technical and business information of Employer, including any records or documents which Employee shall compile while employed with Employer, are to be considered confidential.
     2.  Non-competition and Non-solicitation .
          2.1 Non-competition .
     (a) During and After Employment. Throughout the period of Employee’s employment with Employer, and thereafter for the period described in Section 2.1(c) set forth below, Employee shall not, for any reason whatsoever, directly or indirectly, plan, organize, advise, own, manage, operate, control, be employed by, participate in or be connected in any manner with the ownership, management, operation or control of any business similar to the type of business conducted by Employer, and will not conspire with others to do so as a shareholder, officer, director, agent, employee, advisor, consultant or independent contractor of any competing business. A competing business includes any corporation, limited liability company, partnership, proprietorship, association, or other entity or person engaged in developing, producing, designing, providing, soliciting orders for, selling, distributing or marketing products or services that directly or indirectly compete with any of the Company’s products, services or business. Ownership by Employee, as a passive investment, of capital stock or other securities of any corporation dissimilar from the Company shall not constitute a breach of this Section 2.1(a).
     (b) Restriction as to Territory. Employee’s agreement not to compete against Employer shall extend throughout the territory where it actually does business or may reasonably expect to do business and the territory where its customers are located.
     (c) Restriction as to Duration. The duration of this agreement not to compete shall extend throughout the term of Employee’s employment with Employer and for an additional twelve (12) months thereafter; provided, however, that the duration of the foregoing covenant shall be extended beyond the time period set forth herein for a period equal to the duration of any breach or default of such covenant by Employee. Employee agrees that this restriction as to duration is reasonable in light of the nature of Employee’s job.
     (d) Independent Covenant. Employee’s agreement not to compete as set forth in this Section 2.1 is understood to be an independent covenant and

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agreement on Employee’s part which may be enforced against Employee regardless of any claim Employee may have or assert against Employer.
     (e) Court Ruling . In the event that the foregoing agreement not to compete is determined by a court of competent jurisdiction to be excessive in its duration or in the area to which it applies, it shall be considered modified and valid for such duration and for such area as said court may determine to be reasonable under the circumstances.
          2.2 Non-solicitation . Employee further agrees that Employee will not at any time during employment with the Company and for the period of twelve (12) months following the last day of employment with the Company, directly or indirectly, induce or influence any employee of the Company to leave the employ of the Company or any consultant or other independent contractor for the Company to change or terminate any relationship between that person and the Company.
          2.3 Prohibited Activity . Employee further agrees that, Employee will not, directly or indirectly, assist or encourage any other person in carrying out, directly or indirectly, any activity that would be prohibited by the above provisions of this Section 2 if such activity were carried out by Employee, directly or indirectly, or induce any employee of the Company to carry out, directly or indirectly, any such activity.
     3.  Copy to New Employer . Throughout the term of this Agreement, and for a period of twelve (12) months thereafter, Employee will inform Employee’s new or prospective employer, prior to accepting employment, of the existence of this Agreement and will provide such employer a copy thereof.
     4.  Termination . Notwithstanding any termination of employment, Employee, in consideration of employment through the date of such termination, shall remain bound by the provisions of this Agreement, which specifically relate to periods, activities or obligations upon or subsequent to the termination of Employee’s employment.
     5.  Settlement of Disputes .
          5.1 Resolution of Certain Claims - Injunctive Relief . Claims brought by the Company asserting a violation of this Agreement, or seeking to enforce, by injunction or otherwise, the terms this Agreement may be maintained by the Company in a lawsuit subject to the terms of Section 5.2. Employee agrees that, in addition to, but not to the exclusion of any other available remedy, the Company shall have the right to enforce the provisions of this Agreement by applying for and obtaining temporary and permanent restraining orders or injunctions from a court of competent jurisdiction without the necessity of filing a bond therefore, and the Company shall be entitled to recover from Employee its reasonable attorneys’ fees and costs in enforcing this Agreement.
          5.2 Venue . Any action at law, suit in equity, or judicial proceeding arising directly, indirectly, or otherwise in connection with, out of, related to or from this Agreement or any provision hereof, shall be litigated only in the courts of the state of Minnesota, or the Federal District Court, District of Minnesota. Employee waives any right Employee may have to transfer

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or change the venue of any litigation brought against Employee by the Company. Employee also waives any claim of inconvenient forum.
          5.3 Severability . In the event any provision of this Agreement is found to be illegal or unenforceable, such provision shall be severed or modified to the extent necessary to make it enforceable, and as so severed or modified, the remainder of this Agreement shall remain in full force and effect. Employee expressly stipulates that this Agreement be given the construction which renders its provisions valid and enforceable to the maximum extent (not exceeding its express terms possible under applicable law).
     6.  Miscellaneous .
          6.1 Governing Law . This Agreement is made under and shall be governed by and construed in accordance with the laws of the state of Minnesota other than its law dealing with conflicts of law.
          6.2 Amendments . No amendment or modification of this Agreement shall be deemed effective unless made in writing and signed by both Employee and the Company.
          6.3 No Waiver . No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel to enforce any provision of this Agreement, except by a statement in writing signed by the party against whom enforcement of the waiver or estoppel is sought. Any written waiver shall not be deemed a continuing waiver unless specifically stated, shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived.
          6.4 Assignment . This Agreement shall not be assignable, in whole or in part, by the Employee. This Agreement is freely assignable by the Company in connection with a sale of substantially all of the equity or assets of the Company.
          6.5 Effect of Agreement . Nothing contained in this Agreement is intended to create an express or implied contract of employment or guarantee of employment. Employee agrees that Employee is employed “at will” and agrees that the Company is not by reason of this Agreement obligated to continue Employee’s employment at any time, for any reason.
          6.6 Counterparts . This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument.
          6.7 Captions and Headings . The captions and paragraph headings used in this Agreement are for convenience of reference only, and shall not affect the construction or interpretation of this Agreement or any of the provisions thereof.

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     IN WITNESS WHEREOF, Employee and the Company have executed this Agreement as of the date set forth in the first paragraph.
             
    WSI INDUSTRIES, INC.
 
           
 
  By:        
         
 
           
 
      Its:    
 
           
 
           
    EMPLOYEE
 
           
 
           
     
[Restrictive Covenant Agreement entered into by Michael J. Pudil on October 7, 2009, Paul D. Sheely on October 7, 2009 and Benjamin Rashleger on October 12, 2009.]

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EXHIBIT 10.4
EMPLOYMENT AGREEMENT
     THIS AGREEMENT (“Agreement”) is entered into as of October 7, 2009 by and between WSI Industries, Inc. (the “Company”), and Michael J. Pudil (the “Executive”).
     WHEREAS, the parties previously entered into an employment agreement to provide for the Executive’s services as Chief Executive Officer and President of the Company.
     WHEREAS, the Executive is expected to eventually retire as Chief Executive Officer and the parties decided to establish a transition period, by initially establishing a separate position of President, which would provide the Company with the opportunity to proactively implement an orderly succession plan.
     WHEREAS, the parties desire to enter into a new employment agreement to set forth their mutual understanding and agreement on their employment relationship including certain matters regarding the possibility that Executive would eventually retire as Chief Executive Officer after a transition period.
     NOW, THEREFORE, in consideration of the promises and the respective undertakings of the Company and Executive set forth below, the Company and Executive agree as follows:
     1.  Employment . The Company hereby employs Executive and Executive accepts such employment as an executive officer of the Company reporting to the Company’s Board of Directors. Except as expressly provided herein, termination of this Agreement by either party shall also terminate Executive’s employment by the Company.
     2.  Term . Employment with the Company shall be for a term beginning on the date of this Agreement and ending on December 31, 2011, subject to earlier termination as provided herein.
     3.  Position and Duties .
          3.1 Service with Company . During the term of this Agreement, Executive agrees to perform such reasonable employment duties for the Company as shall arise in connection with his position as Chief Executive Officer of the Company or as otherwise directed by the Company’s Board of Directors (the “Board”). During the term of this Agreement, for so long as Executive’s successor continues to serve in the position of President, Executive shall serve in a transitional role to facilitate an orderly transition of Chief Executive Officer responsibilities to his successor and provide such other services as may be reasonably requested by the Board or the successor during the term.
          3.2 Performance of Duties . Executive agrees to serve the Company faithfully and to the best of his ability, and to devote his full time attention and efforts to the business and affairs of the Company during the term of this Agreement as is reasonably necessary to execute his duties hereunder. The Executive agrees that during the term of this Agreement, he will not render or perform services for any other corporation, firm, entity or person which are

 


 

inconsistent with the provisions of this Agreement or which are considered in business competition with the Company.
     4.  Compensation .
          4.1 Base Salary . During the term of this Agreement, as compensation for all services to be rendered by Executive under this Agreement, the Company shall pay to Executive an annualized Base Salary (“Base Salary”) of $222,120.00. The Company shall pay the Base Salary in accordance with normal Company payroll practices, subject to state and federal taxes, social security and any other applicable withholdings. Notwithstanding the foregoing, the annualized Base Salary would be reduced to $100,000 during any period of the term after December 31, 2009 in which Executive’s successor continues to serve in the position of President.
          4.2 Fringe Benefits . Executive shall be entitled to such insurance, vacation, profit sharing and other benefits as are currently available, subject to any limitations on such benefits to officers, directors or highly paid employees in order that such benefit programs qualify under federal and state law for favored tax or other treatment. Such benefit programs may be changed from time to time by the Board provided they are changed uniformly for all officers of the Company. Executive shall also be entitled to special medical benefits (as currently in effect).
          4.3 Business Expenses . The Company will pay or reimburse Executive for all reasonable and necessary out-of-pocket expenses incurred by him for the benefit of the Company in the performance of his duties under this Agreement, subject to compliance by Executive with the Company’s policies for expense reimbursements.
     5.  Restrictive Covenant Agreement . In consideration of employment, and the severance offered to Executive under Section 6, to which the Executive was not otherwise entitled to, the Executive agrees to execute a Restrictive Covenant Agreement, attached hereto as Exhibit A .
     6.  Termination and Payment to Executive .
          6.1 Termination Date . This Agreement and Executive’s employment hereunder shall terminate upon the occurrence of any one or more of the following:
          (a) Death . In the event of Executive’s death, this Agreement and Executive’s employment hereunder shall automatically terminate on the date of death.
          (b) Disability . To the extent permitted by law, in the event of Executive’s physical or mental disability that prevents Executive from performing the essential functions of Executive’s duties under this Agreement (with or without reasonable accommodation) for a period of at least 90 consecutive days in any 12-month period or 120 non-consecutive days in any 12-month period, Employer may terminate this Agreement and Executive’s employment hereunder upon giving written notice of termination to Executive.

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          (c) Termination by Employer for Cause . Employer may, at its option, terminate this Agreement and Executive’s employment hereunder for Cause (as defined below) upon giving written notice of termination to Executive. “Cause” shall mean any of the following: (i) Executive has engaged in dishonesty, illegal or other wrongful conduct substantially detrimental to the business or reputation of the Company or any of its subsidiaries or affiliates; (ii) Executive has developed or pursued interests substantially adverse to the Company or any of its subsidiaries or affiliates; (iii) Executive has willfully and continuously failed to substantially perform his duties with the Company (other than any such failure resulting from Executive’s incapacity due to physical or mental disability), after written notice of such failure and opportunity to cure; or (iv) Executive’s conviction of, or guilty plea or nolo contendere plea to a felony involving moral turpitude, fraud or misrepresentation; provided that an act of Executive shall not be deemed “willful” unless done or omitted to be done by Executive not in good faith and without reasonable belief that the act or omission was in the Company’s best interests.
          (d) Without Cause by Employer . Employer may, at its option, at any time terminate this Agreement and Executive’s employment hereunder for no reason or for any reason whatsoever (other than for Cause or as a result of Executive’s death or Disability) by giving written notice of termination to Executive.
          (e) Termination by Executive. Executive may terminate this Agreement and Executive’s employment hereunder with or without Good Reason (as defined below) by giving thirty (30) days prior written notice of termination to Employer. “Good Reason” shall mean, without Executive’s express written consent, any of the following: (i) a material reduction in Executive’s Base Salary or benefits required under this Agreement; (ii) a change in Executive’s reporting directly to the Board of Directors; (iii) a material change in the geographic location at which Executive must perform services for the Company; and (iv) any other action or inaction that constitutes a material violation of this Agreement by the Company; provided that no such termination for Good Reason shall be effective unless: (A) Executive provides written notice to the Chair of the Compensation Committee of the Board of the existence of a condition specified in clauses (i) through (iv) of this sentence within 90 days of the initial existence of the condition; (B) the Company does not remedy such condition within 30 days of the date of such notice; and (C) Executive terminates his employment within 90 days following the last day of the remedial period described above.
          6.2 Termination for Cause or by Executive without Good Reason . In the event of a termination of this Agreement and Executive’s employment hereunder pursuant to Sections 6.1 (c) or 6.1(e) (other than a termination for Good Reason), then this Agreement and Executive’s employment with Employer shall terminate and Employer’s sole obligation under this Agreement or otherwise shall be to: (i) pay to Executive any Base Salary earned, but not yet paid, prior to the effective date of the termination of this Agreement and Executive’s employment hereunder (the “ Date of Termination ”) and any earned but unused vacation and personal leave, payable in accordance with Employer’s standard payroll practices; (ii) reimburse Executive for any expenses incurred by Executive through the Date of such Termination in accordance with Section 4.3 above; and (iii) pay and/or provide any amounts or benefits that are vested amounts or vested benefits or that Executive is otherwise entitled to receive under any plan, program, policy or practice (with the exception of those, if any, relating to severance) on

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the Date of Termination, in accordance with such plan, program, policy, or practice (clauses (i), (ii), and (iii) of this sentence are collectively referred to herein as the “ Accrued Obligations ”).
          6.3 Death, Disability, Termination without “Cause” or by Executive for “Good Reason” or End of Term . If Executive is terminated without Cause, Executive terminates his employment for Good Reason, Executive dies or becomes Disabled during the term of this Agreement or Executive continues to be employed by the Company until this Agreement terminates on December 31, 2011, upon execution of a release of claims against the Company similar to the attached Exhibit B (other than in the event of death) no later than the date set forth in that Exhibit B, and following expiration of the rescission period described therein:
          (a) the Company will pay all Accrued Obligations as provided in Section 6.2 above;
          (b) the Company will pay Executive a lump sum severance payment equal to $335,000 (approximately 18 months base salary), less applicable taxes and withholdings, on a date that is six months and 1 day after the effective date of Executive’s termination of employment, except that, in the event of death or Disability, payment shall be made no later than 30 days after the date of death or determination of Disability; and
          (c) except in the event of death of Executive, the Company will continue to be responsible to pay the same portion of the monthly premium that it paid immediately prior to Executive’s employment (the “Employer Premium”) towards Executive’s group health, dental and life insurance (and special medical) for the eighteen (18) month period following such termination, provided Executive elects continuation of coverage following separation and continues to be eligible for continuation coverage under COBRA. In the event the Company’s payment of the Employer Premium is required to be delayed under Treas. Reg. §1.409A-3(i)(2), the Executive shall be responsible to pay any COBRA premium due during such delay, and the Company shall reimburse to the Executive, in a lump sum, at the same time as the payment set forth in Section 6.3(b) the cumulative Employer Premiums that the Executive paid prior to that date, and thereafter the Company shall pay the Employer Premium at such time as such premiums are due. Upon the expiration of the eighteen (18) month period following termination, the Company shall pay Executive a lump sum payment in an amount equal to the Employer Premium multiplied by the number of months in the period starting with the first month immediately following the eighteen (18) month period following termination and ending with the month in which the earlier of the following dates occurs: (i) the date Executive reaches age 65 or (ii) the date Executive is expected to qualify for Medicare; and
          (d) the unvested portion of all outstanding stock options shall become fully vested as of the last day of Executive’s employment and Executive shall have the ability to exercise all vested stock options during such eighteen (18) month period following Executive’s termination; provided no stock option shall be exercisable after its original expiration date, and (b) the restrictions on all outstanding restricted stock awards shall lapse as of the last day of the Executive’s employment. The provisions of this Section 6.3 shall supersede any provisions of the stock option and restricted stock award agreement that is inconsistent herewith, and shall be deemed an amendment to any such agreement executed by the Company and the Executive. The terms of this Agreement have been approved by the Compensation Committee of the Board in

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compliance with the terms of the Company’s 2005 Stock Plan.
The Company and the Executive shall take all steps necessary (including with regard to any post-termination services by Executive) to ensure that any termination of employment described in this Section 6.3 constitutes a “separation from service” within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), and notwithstanding anything contained herein to the contrary, the date of such separation from service shall be the date of termination of employment under this Agreement.
          6.4 Effect of Termination . Notwithstanding any termination of this Agreement, Executive, in consideration of his employment thereunder to the date of such termination shall remain bound by the provisions of this Agreement which specifically relate to periods, activities or obligations upon or subsequent to the termination of Executive’s employment.
          6.5 Surrender of Records and Property . Upon termination of his employment with the Company, Executive shall deliver promptly to the Company all records, manuals, books, blank forms, documents, letters, memoranda, notes, notebooks, reports, data, tables, calculations or copies thereof, computers, cellular phones or any other equipment which are the property of the Company or which relate in any way to the business products, practices or techniques of the Company, and all other property, trade secrets and confidential information of the Company, including, but not limited to, all documents which in whole or in part contain any trade secrets, proprietary or Confidential Information of the Company, which in any of the cases are in his possession or under his control.
          6.6 No Additional Pay/Benefits . Except as specifically set forth above, no post-termination payments or benefits will be provided to Executive following the termination of Executive’s employment, including any incentive pay or other bonus, during which the severance pay is paid, unless otherwise provided under law or agreed to by the parties in writing and such agreement is not contrary to or otherwise prohibited by a plan document.
          6.7 Board Status . Nothing herein shall be construed as a contractual right of the Executive to serve as a Chairman or as a member of the Board of Directors.
          6.8 Grantor Trust . No later than 5 business days following the earlier of (i) a “change in control” of the Company (as defined in Treas. Reg. §1.409A-3(i)(5)), (ii) the termination of Executive by the Company without Cause, (iii) the termination by Executive of his employment for Good Reason or (iv) December 31, 2011, provided Executive continues to be employed by the Company through such date, the Company shall establish an irrevocable grantor trust in a form substantially similar to the form of trust set forth in Rev. Proc. 92-64, as modified by Notice 2000-56, and deposit the amounts required to be paid Executive under the terms of Section 6.3(b) and Section 6.3(c) in cash with the trustee in trust, which will be the initial principal of the trust to be held, administered and disposed of by trustee as provided in such trust agreement and this Agreement.

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     7.  Miscellaneous .
          7.1 Governing Law . This Agreement is made under and shall be governed by and construed in accordance with the laws of the state of Minnesota other than its law dealing with conflicts of law.
          7.2 Venue . Any action at law, suit in equity, or judicial proceeding arising directly, indirectly, or otherwise in connection with, out of, related to or from this Agreement or any provision hereof, shall be litigated only in the courts of the state of Minnesota, County of Hennepin, or the Federal District Court, District of Minnesota, Fourth Division. Executive waives any right Executive may have to transfer or change the venue of any litigation brought against Executive by the Company. Executive also waives any claim of inconvenient forum.
          7.3 Severability . To the extent any provision of this Agreement shall be invalid or unenforceable, it shall be considered deleted therefrom and the remainder of such provision and of this Agreement shall be unaffected and shall continue in full force and effect. In furtherance and not in limitation of the foregoing, should the duration or geographical extent of, or business activities covered by, any provision of this Agreement be in excess of that which is valid and enforceable under applicable law, then such provision shall be construed to cover only that duration, geographical extent or business activities which may be valid and enforceable under applicable law. Executive acknowledges the uncertainty of the law in this respect and expressly stipulates that this Agreement be given the construction which renders its provisions valid and enforceable to the maximum extent (not exceeding its express terms possible under applicable law.)
          7.4 Prior Agreements . This Agreement contains the entire agreement of the parties relating to the employment of Executive by the Company and the ancillary matters discussed therein, including all Exhibits and supersedes all prior agreements and understandings with respect to such matters, including without limitation the Employment (Change in Control) Agreement dated January 11, 2001, as amended, and the Employment Agreement dated October 22, 1993, as amended, and the parties thereto have made no agreements, representations or warranties relating to such employment or ancillary matters except as expressly set forth herein.
          7.5 Withholding Taxes . The Company may withhold from any benefits payable under this Agreement all federal, state, city or other taxes as shall be required pursuant to any law or governmental regulation or ruling. It is intended that any amounts payable under this Agreement will comply with Section 409A of the Code, and treasury regulations relating thereto, so as not to subject Executive to the payment of any interest and tax penalty which may be imposed under Section 409A of the Code, provide however that the Executive, and not the Company shall be responsible for any such interest and tax penalties. The timing of the payments or benefits provided herein may be modified to so comply with Section 409A of the Code.
          7.6 Amendments . No amendment or modification of this Agreement shall be deemed effective unless made in writing and signed by both Executive and the Company.

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          7.7 No Waiver . No term or condition of this Agreement shall be deemed to have been waived, nor there any estoppel to enforce any provision of this Agreement, except by a statement in writing signed by the party against whom enforcement of the waiver or estoppel is sought. Any written waiver shall not be deemed a continuing waiver unless specifically stated, shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived.
          7.8 Assignment . This Agreement shall not be assignable, in whole or in part, by the Executive. This Agreement shall be binding upon and inure to the benefit of the Company and its successors and assigns and upon any person acquiring, by merger, consolidation, purchase of assets or otherwise, all or substantially all of the assets and business of the Company, and the successor shall be substituted for the Company under this Agreement.
          7.9 Legal Fees . The Company shall reimburse Executive for the reasonable, and appropriately documented, fees and expenses of legal counsel to Executive in connection with the negotiation and execution of this Agreement, up to a maximum total reimbursement of $5,000.
          7.10 Counterparts . This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument.
          7.11 Captions and Headings . The captions and paragraph headings used in this Agreement are for convenience of reference only, and shall not affect the construction or interpretation of this Agreement or any of the provisions thereof.
     IN WITNESS WHEREOF, Executive and the Company have executed this Agreement as of the date set forth in the first paragraph.
         
  WSI Industries, Inc.
 
 
  By  /s/ Paul D. Sheely    
    Its Chief Financial Officer   
     
 
  Executive
 
 
  /s/ Michael J. Pudil    
  Michael J. Pudil   
     
 

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EXHIBIT A
RESTRICTIVE COVENANT AGREEMENT
     THIS RESTRICTIVE COVENANT AGREEMENT (“Agreement”) is entered into as of October 7, 2009, by and between Michael J. Pudil (“Employee”) and WSI Industries, Inc., (the “Company” or the “Employer”).
     IN CONSIDERATION of employment, and the severance and other benefits offered Employee under the Employment Agreement dated this date between Employee and Employer, to which Employee was not otherwise entitled to, the Company and Employee agree as follows:
     1. Confidential Information.
          1.1 “Confidential Information” Defined . “Confidential Information” means information not generally known and proprietary to the Company or to a third party for whom the Company is performing work, including, without limitation, information concerning any patents or trade secrets, confidential or secret designs, processes, formulae, source codes, plans, devices or material, research and development, proprietary software, analysis, techniques, materials or designs (whether or not patented or patentable), directly or indirectly useful in any aspect of the business of the Company, any vendor names, customer and supplier lists, databases, management systems and sales and marketing plans, accounting and financial reports, evaluations, statements, audits of the Company or other affiliated entity, any confidential secret development or research work of the Company, or any other confidential information or proprietary aspects of the business of the Company. All information which Employee acquires or becomes acquainted with during Employee’s employment by the Company (including employment by an affiliated company), whether developed by Employee or by others, which Employee has a reasonable basis to believe to be Confidential Information, or which is treated by the Company as being Confidential Information, shall be presumed to be Confidential Information.
          1.2 Disclosures and Use by Employee. Employee will not, during or at any time after the term of employment under this Agreement, divulge, disclose or communicate to any person or entity, or use for Employee’s benefit or for the benefit of any third party, in any manner whatsoever, whether directly or indirectly, any information concerning any matters affecting or relating to the business of Employer, including any of its customers, the prices it obtains or has obtained from the sale of, or at which it sells or has sold, its products, or any other information concerning its business, its manner of operation, its plans, processes, specifications, merchandising techniques, or other data. Employee understands that such matters and information are important, material, and confidential and are necessary to the effective and successful conduct of Employer’s business and goodwill, and that any breach of the terms of this paragraph shall be a material breach of this agreement.
          1.3 Scope of Obligation . The foregoing obligations of confidentiality shall not apply to any knowledge or information which is now published or which subsequently becomes generally publicly known in the form in which it was obtained from the Company, other than as a direct or indirect result of the breach of this Agreement by Employee.

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          1.4 Ownership Rights: Confidentiality. Employee shall not acquire any rights hereunder or during employment to any documents, records, tangible property, goodwill, trade secrets, customer lists, proprietary interests, Confidential Information, or other property of Employer, whether tangible or intangible. All such technical and business information of Employer, including any records or documents which Employee shall compile while employed with Employer, are to be considered confidential.
     2.  Non-competition and Non-solicitation .
          2.1 Non-competition .
     (a) During and After Employment. Throughout the period of Employee’s employment with Employer, and thereafter for the period described in Section 2.1(c) set forth below, Employee shall not, for any reason whatsoever, directly or indirectly, plan, organize, advise, own, manage, operate, control, be employed by, participate in or be connected in any manner with the ownership, management, operation or control of any business similar to the type of business conducted by Employer, and will not conspire with others to do so as a shareholder, officer, director, agent, employee, advisor, consultant or independent contractor of any competing business. A competing business includes any corporation, limited liability company, partnership, proprietorship, association, or other entity or person engaged in developing, producing, designing, providing, soliciting orders for, selling, distributing or marketing products or services that directly or indirectly compete with any of the Company’s products, services or business. Ownership by Employee, as a passive investment, of capital stock or other securities of any corporation dissimilar from the Company shall not constitute a breach of this Section 2.1(a).
     (b) Restriction as to Territory. Employee’s agreement not to compete against Employer shall extend throughout the territory where it actually does business or may reasonably expect to do business and the territory where its customers are located.
     (c) Restriction as to Duration. The duration of this agreement not to compete shall extend throughout the term of Employee’s employment with Employer and for an additional twelve (12) months thereafter; provided, however, that the duration of the foregoing covenant shall be extended beyond the time period set forth herein for a period equal to the duration of any breach or default of such covenant by Employee. Employee agrees that this restriction as to duration is reasonable in light of the nature of Employee’s job.
     (d) Independent Covenant. Employee’s agreement not to compete as set forth in this Section 2.1 is understood to be an independent covenant and agreement on Employee’s part which may be enforced against Employee regardless of any claim Employee may have or assert against Employer.

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     (e) Court Ruling. In the event that the foregoing agreement not to compete is determined by a court of competent jurisdiction to be excessive in its duration or in the area to which it applies, it shall be considered modified and valid for such duration and for such area as said court may determine to be reasonable under the circumstances.
          2.2 Non-solicitation . Employee further agrees that Employee will not at any time during employment with the Company and for the period of twelve (12) months following the last day of employment with the Company, directly or indirectly, induce or influence any employee of the Company to leave the employ of the Company or any consultant or other independent contractor for the Company to change or terminate any relationship between that person and the Company.
          2.3 Prohibited Activity . Employee further agrees that, Employee will not, directly or indirectly, assist or encourage any other person in carrying out, directly or indirectly, any activity that would be prohibited by the above provisions of this Section 2 if such activity were carried out by Employee, directly or indirectly, or induce any employee of the Company to carry out, directly or indirectly, any such activity.
     3.  Copy to New Employer. Throughout the term of this Agreement, and for a period of twelve (12) months thereafter, Employee will inform Employee’s new or prospective employer, prior to accepting employment, of the existence of this Agreement and will provide such employer a copy thereof.
     4.  Termination . Notwithstanding any termination of employment, Employee, in consideration of employment through the date of such termination, shall remain bound by the provisions of this Agreement, which specifically relate to periods, activities or obligations upon or subsequent to the termination of Employee’s employment.
     5.  Settlement of Disputes .
          5.1 Resolution of Certain Claims - Injunctive Relief . Claims brought by the Company asserting a violation of this Agreement, or seeking to enforce, by injunction or otherwise, the terms this Agreement may be maintained by the Company in a lawsuit subject to the terms of Section 5.2. Employee agrees that, in addition to, but not to the exclusion of any other available remedy, the Company shall have the right to enforce the provisions of this Agreement by applying for and obtaining temporary and permanent restraining orders or injunctions from a court of competent jurisdiction without the necessity of filing a bond therefore, and the Company shall be entitled to recover from Employee its reasonable attorneys’ fees and costs in enforcing this Agreement.
          5.2 Venue . Any action at law, suit in equity, or judicial proceeding arising directly, indirectly, or otherwise in connection with, out of, related to or from this Agreement or any provision hereof, shall be litigated only in the courts of the state of Minnesota, or the Federal District Court, District of Minnesota. Employee waives any right Employee may have to transfer or change the venue of any litigation brought against Employee by the Company. Employee also waives any claim of inconvenient forum.

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          5.3 Severability . In the event any provision of this Agreement is found to be illegal or unenforceable, such provision shall be severed or modified to the extent necessary to make it enforceable, and as so severed or modified, the remainder of this Agreement shall remain in full force and effect. Employee expressly stipulates that this Agreement be given the construction which renders its provisions valid and enforceable to the maximum extent (not exceeding its express terms possible under applicable law).
     6.  Miscellaneous .
          6.1 Governing Law . This Agreement is made under and shall be governed by and construed in accordance with the laws of the state of Minnesota other than its law dealing with conflicts of law.
          6.2 Amendments . No amendment or modification of this Agreement shall be deemed effective unless made in writing and signed by both Employee and the Company.
          6.3 No Waiver . No term or condition of this Agreement shall be deemed to have been waived, nor there any estoppel to enforce any provision of this Agreement, except by a statement in writing signed by the party against whom enforcement of the waiver or estoppel is sought. Any written waiver shall not be deemed a continuing waiver unless specifically stated, shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived.
          6.4 Assignment . This Agreement shall not be assignable, in whole or in part, by the Employee. This Agreement is freely assignable by the Company in connection with a sale of substantially all of the equity or assets of the Company
          6.5 Effect of Agreement . Nothing contained in this Agreement is intended to create an express or implied contract of employment or guarantee of employment. Employee agrees that Employee is employed “at will” and agrees that the Company is not by reason of this Agreement obligated to continue Employee’s employment at any time, for any reason.
          6.6 Counterparts . This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument.
          6.7 Captions and Headings . The captions and paragraph headings used in this Agreement are for convenience of reference only, and shall not affect the construction or interpretation of this Agreement or any of the provisions thereof.

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     IN WITNESS WHEREOF, Employee and the Company have executed this Agreement as of the date set forth in the first paragraph.
         
 

WSI INDUSTRIES, INC.
 
  By:    
       
      Its:  
 
  EMPLOYEE

 
  Michael J. Pudil, individually 

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EXHIBIT B
SEPARATION AGREEMENT AND RELEASE
     This Separation Agreement and Release (hereafter “Agreement”) is entered into by and between Michael J. Pudil (hereinafter referred to as “Pudil,” “you” or “your”) and WSI Industries, Inc. (“WSI”).
RECITALS:
     WHEREAS, Pudil was employed by WSI as an at-will employee under the terms of the certain Employment Agreement dated as of October 7, 2009 (“Employment Agreement”), which means that either Pudil or WSI may terminate that employment relationship at any time with or without cause; and
     WHEREAS, effective                                           , WSI and Pudil separated their employment relationship (“Separation Date”); and
     WHEREAS, in accordance with the Employment Agreement, WSI has offered Pudil severance to which Pudil was not otherwise entitled to, in return for a release of all claims against WSI;
     NOW, THEREFORE, in consideration of the foregoing and the mutual promises and covenants herein, and for other good and valuable consideration, the receipt and sufficiency of which is specifically acknowledged by Pudil and WSI, the parties knowingly and voluntarily agree as follows:
     7.  Payment of Accrued Obligations . WSI will pay and provide to you the Accrued Obligations as set forth in Section 6.3(a) of the Employment Agreement, subject to applicable withholding, at the time and in the manner provided therein.
     8.  Payment of Severance and Other Benefits . WSI will pay you the amounts set forth in Section 6.3(b) and (c) of the Employment Agreement, subject to applicable withholding, at the time and in the manner provided therein, following expiration of the rescission period described in Paragraph 5 of this Agreement and WSI’s receipt of Exhibit A, signed and dated by you after expiration of the rescission period. Exhibit A is your certification that you have taken no steps to exercise your right of rescission.
     9.  Release . In consideration for the benefits outlined in Section 2 above, you agree to the following:
  a.   You hereby release, agree not to sue, and forever discharge WSI, Inc., its affiliates, and related entities, and its officers, governors, members, agents, employees, successors and assigns, from any and all manner of claims, demands, actions, causes of action, administrative claims, liability, damages, claims for punitive or liquidated damages, claims for attorneys’ fees, costs and disbursements, individual or class action claims, or demands of any kind whatsoever, you have or might have against them or

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any of them, whether known or unknown, in law or equity, contract or tort, arising out of or in connection with your employment with WSI, or the termination of that employment, or otherwise, and however originating or existing, from the beginning of time through the date of your signing this Agreement.
  b.   This release includes, without limiting the generality of the foregoing, any claims you may have for wages, bonuses, commissions, penalties, deferred compensation, vacation pay, separation pay and/or benefits, defamation, improper discharge (based on contract, common law, or statute, including any federal, state or local statute or ordinance prohibiting discrimination or retaliation in employment), the Minnesota Human Rights Act, Title VII of the Civil Rights Act of 1964, as amended, the Age Discrimination in Employment Act, as amended by the Older Workers Benefit Protection Act, the Americans with Disabilities Act, Minn. Stat. § 181.932, Minn. Stat.§ 176.82 and any claim for discrimination or retaliation based on a protected class under state or federal law. You hereby waive any and all relief not provided for in this Agreement.
 
  c.   You affirm that you have not caused or permitted, and to the full extent permitted by law, will not cause or permit to be filed (to the extent that you are able to control such filing), any charge, complaint, or action of any nature or type against WSI, and its successors and assigns, including but not limited to any action or proceeding raising claims arising in tort or contract, or any claims arising under federal, state or local laws, including discrimination laws.
     10.  Consideration Period . You may review this Agreement with an attorney of your choosing. You have 21 days from                      , 20___, to consider whether you wish to sign it. You acknowledge that if you sign this Agreement before the end of the 21 day period, it is your voluntary decision to do so, and you waive the remainder of the 21 day period.
     11.  Rescission . You are hereby notified of your right to rescind this Agreement within seven (7) calendar days of your signing to reinstate federal claims under the Age Discrimination in Employment Act and your right to rescind this Agreement within 15 calendar days with regard to claims arising under the Minnesota Human Rights Act. In order to be effective, the rescission must be in writing and delivered to Paul Sheely, Vice President - Finance, WSI Industries, Inc., 213 Chelsea Road, Monticello, MN 55362, by hand or by mail within the required period; and if delivered by mail, the rescission must be postmarked within the required period, properly addressed to Paul Sheely and sent by certified mail, return receipt requested. This Agreement will be effective upon the expiration of the 15 day period without rescission. You understand that if you rescind this Agreement in accordance with this paragraph, you will not receive the severance payment described in Paragraph 1 above.
     12. Return of All Property . You acknowledge return of all WSI property, including keys, credit cards, security access cards, codes, personal computers, memoranda, data, records, notes and other information in your possession or under your control in any media form. You

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will be permitted supervised access to the computer you used during employment to copy and remove all personal data and software.
     13.  Non-Disclosure of Confidential Information . By signing this Agreement, you acknowledge and agree that you have had access in your employment with WSI to confidential information of and further acknowledge and agree that the release or disclosure of any confidential information will cause WSI irreparable injury. By signing this Agreement, you acknowledge that you have not used or disclosed, and agree that you will not at any time use or disclose, directly or indirectly, to any other entity or person, any confidential information of WSI.
     14.  Confidentiality of this Agreement . You also promise and agree not to disclose the contents and terms of this Agreement. You agree that the only people with whom you may discuss this Agreement are your spouse and legal and financial advisors, provided they agree to keep the information confidential or as otherwise required by law. WSI may disclose the terms of this Agreement to its officers, directors, outside auditors, and employees or agents who have a legitimate need to know the terms of the Agreement in the course of performing their duties or as required by law or regulation of the Securities and Exchange Commission. Other than as set forth above, the terms of the Agreement shall not be disclosed, except pursuant to written authorization by the other party.
     15.  Non-disparagement . The parties agree that they will not disparage or defame each other in any respect or make any negative comments concerning the employment relationship, the termination thereof, or the matters contained in this Agreement. You agree that you will not assist or encourage any individual or group of individuals to bring or pursue a lawsuit, charge, complaint or grievance, or in making any other demand against WSI, or any of its officers, employees, or agents.
     16.  No Admission . This Agreement shall not in any way be construed as an admission by WSI of any liability or unlawful conduct whatsoever. WSI specifically denies any liability or unlawful conduct.
     17.  Severability . In the event that any provision of this Agreement is found to be illegal or unenforceable, such provision shall be severed or modified to the extent necessary to make it enforceable, and as so severed or modified, the remainder of this Agreement shall remain in full force and effect.
     18.  Governing Law . This Agreement shall be governed and construed in accordance with laws of the State of Minnesota, other than its law dealing with conflicts of law.
     19. Entire Agreement . This Agreement contains the full agreement between you and WSI and may not be modified, altered, or changed in any way, except by written agreement signed by the parties. The parties agree that this Agreement supersedes and terminates any and all other written and oral agreements and understandings between the parties on this matter. You are not eligible for any other payment or benefits, except for those expressly described in this Agreement, provided that you sign and do not rescind this Agreement. Notwithstanding the foregoing, the terms of the Restrictive Covenant Agreement and any remaining terms under the

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Employment Agreement between you and WSI that continue following your termination of employment shall remain in full force and effect.
     20.  Acknowledgement of Release . By signing this Agreement, you acknowledge that you have read this Agreement, including the release of claims contained in this Agreement, and understand that the release of claims is a full and final release of all claims you may have against WSI and the other entities and individuals covered by the release. By signing, you also acknowledge and agree that you have entered into this Agreement knowingly and voluntarily.
WSI Industries, Inc.
         
By:
       
      
 
 
  Its:    
 
   
 
 
 
I have read and understand and agree to the terms and conditions set forth above and have signed this Agreement freely, voluntarily and with full knowledge and understanding of its meaning.
Dated                      , 20__
         
     
       
    Michael J. Pudil   
       

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EXHIBIT A
to
SEPARATION AGREEMENT AND RELEASE
CERTIFICATION
                     , 20__
WSI Industries, Inc.
                                                                                 
                                                                                    
                                                                                    
Dear                                           :
This letter, signed and dated more than 15 days after I signed the Separation Agreement and Release between WSI and me dated                      , 20___, is to certify that I have taken no steps to exercise my right of rescission, as described in the Agreement.
Sincerely,
                                                                                    

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EXHIBIT 10.5
[WSI INDUSTRIES LETTERHEAD]
Severance Letter Agreement
October 7, 2009
PAUL D. SHEELY
Dear Paul:
The purpose of this Letter Agreement is to set forth our agreement in regard to your severance arrangement. Although your employment is “at will” and may be terminated by you or WSI Industries, Inc. (“WSI”) at any time for any reason, WSI has agreed to provide you with a particular severance pay benefit in the event WSI terminates your employment without Cause (as defined below). Terms not otherwise defined in this letter (the “Letter Agreement”) shall have the meaning given such terms on Schedule 1, which is incorporated herein by reference. WSI’s obligation to you under this Letter Agreement is, among the other requirements set forth below, subject to the condition that you execute a Restricted Covenant Agreement in the form attached as Exhibit A, which is incorporated herein by reference.
Specifically, we have agreed as follows:
1.  Severance .
  (a)   If your employment is terminated by WSI without Cause, subject to the condition stated in Section 1(c), WSI will:
  (i)   continue to pay your base salary in accordance with WSI’s regular payroll practices for a period of twelve (12) months thereafter, or until you have secured other employment, whichever occurs first, subject to applicable tax withholding; and
 
  (ii)   if you are eligible for and elect COBRA or state continuation of the WSI health, dental and group life insurance benefits, WSI shall pay the portion of such COBRA premium that it pays for active employees until the earlier of: (A) twelve (12) months from the date COBRA coverage begins; or (B) the date COBRA coverage otherwise terminates. You shall pay the remaining portion of the premiums for such benefits during such period and, if applicable, the full premium thereafter.
  (b)   If you resign for any reason, if WSI terminates your employment for Cause or if your employment terminates as a result of your death or disability, you shall be entitled to receive your base salary accrued but unpaid as of the date of

 


 

      termination, but shall not be entitled to receive any salary continuation benefit thereafter.
  (c)   In case of termination without Cause, you shall be entitled to receive the amounts due you under Section 1(a) only upon your execution and delivery to WSI of a general release (and following termination of all rescission periods) with respect to any and all claims against WSI and its officers, directors, employees, agents and shareholders, acceptable in form and substance to WSI in all respects, and provided you continue to comply with the terms of the Restricted Covenant Agreement with WSI.
 
  (d)   For purposes of this Agreement, “termination of employment” shall be interpreted consistent with the term “separation from service” within the meaning of Treas. Reg. §1.409A-1(h), and for purposes of Code §409A, each payment shall be considered a separate payment.
2.   Arbitration . All disputes or claims arising out of or in any way related to this Letter Agreement, including the making of this Letter Agreement, shall be submitted to and determined by final and binding arbitration under the American Arbitration Association Rules for Resolution of Employment Disputes. Arbitration proceedings may be initiated by either of us upon notice to the other and to the American Arbitration Association, and shall be conducted by one arbitrator in Minneapolis, Minnesota who has experience in employment matters. Unless we agree to have the person to serve as arbitrator within thirty (30) days of delivery of the list of proposed arbitrators by the American Arbitration Association, then, at the request of either of us, the single arbitrator shall be selected at the discretion of the American Arbitration Association. The arbitrator shall provide a reasoned decision and may award any remedy available at law or equity, including reasonable attorneys’ fees to the prevailing party. WSI shall pay the costs of the arbitrator. The decision of the arbitrator shall be enforceable in any court of competent jurisdiction.
 
3.   Entire Agreement . This Letter Agreement constitutes our entire agreement and supersedes all prior discussions, understandings and agreements with respect to the severance benefits which WSI has agreed to provide to you, except the Employment (Change in Control) Agreement dated January 11, 2001, as amended (the “Change in Control Agreement”), which shall remain in effect according to its terms and which, in the event of conflict with this Letter Agreement shall control. There shall be no duplication of benefits on your behalf in this Agreement and the Change in Control Agreement in the event of the termination of your employment following a Change in Control, as defined in the Change in Control Agreement. This Letter Agreement shall be governed and construed by the laws of the State of Minnesota and may be amended only in writing signed by both of us.
 
4.   Successors . This Letter Agreement shall not be assignable, in whole or in part, by you. This Letter Agreement shall be binding upon and inure to the benefit of WSI and its successors and assigns and upon any person acquiring, by merger, consolidation,

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    purchase of assets or otherwise, all or substantially all of the assets and business of WSI, and the successor shall be substituted for WSI under this Letter Agreement.
5.   Amendment and Termination . WSI reserves the authority, without your consent, to terminate or amend this Letter Agreement at any time upon at least 12 months’ written notice specifying the date of termination or amendment. Notwithstanding the foregoing, it is the intention of the parties that this Agreement be exempt from Code §409A as separation pay to the greatest extent possible. Accordingly, all provisions herein shall be construed and interpreted consistent with that intent, but that, to the extent any payment constitutes nonqualified deferred compensation, WSI shall amend any such provision pertaining to such payment to comply with Code §409A and the regulations thereunder, in the least restrictive manner necessary without any diminution in the value of the payments to you.
 
6.   Delay for Specified Employees . Notwithstanding the foregoing, if on the date of your “separation from service” (within the meaning of Treas. Reg. §1.409A-1(h)), you are a “specified employee” within the meaning of Treas. Reg. §1.409-1(i), then payment of any amount under this Agreement that constitutes nonqualified deferred compensation shall be delayed until the earlier of (i) the first day of the seventh month following your separation from service, (ii) the first date on which such payment would not be non-deductible as a result of Section 162(m) of the Code, or (iii) your death and in the event any such payment is so delayed, the amount of the first payment shall be increased for interest earned on the delayed payment based upon interest for the period of delay, compounded annually, equal to the prime rate (as published in the Wall Street Journal) in effect as of the date the payment should otherwise have been provided.
If this Letter Agreement accurately sets forth our agreement and understanding in regard to these matters, will you please sign this Letter Agreement where indicated below and return the executed letter to me for our files. A separate copy is enclosed for your records.
         
WSI INDUSTRIES, INC.
 
 
By:   /s/ Michael J. Pudil    
  Its: Chief Executive Officer   
     
 
     
READ AND AGREED:
   
 
   
/s/ Paul D. Sheely
   
 
(Name)
   
Dated as of October 7, 2009

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SCHEDULE 1
Definition of “Cause”:
1.   The failure by you to use your best efforts to perform the material duties and responsibilities of your position or to comply with any material policy or directive WSI has in effect from time to time, provided you shall have received notice of such failure and have failed to cure the same within fourteen days of such notice.
 
2.   Any act on your part which is harmful to the reputation, financial condition, business or business relationships of WSI, including, but not limited to, conduct which is inconsistent with federal or state law respecting harassment of, or discrimination against, any WSI employee or harmful to your reputation or business relationships.
 
3.   A material breach of your fiduciary responsibilities to WSI, such as embezzlement or misappropriation of WSI funds, business opportunities or properties, or to any customer, vendor, agent or employee of WSI.
 
4.   Your conviction of, or guilty plea or nolo contendere plea to a felony or any crime involving moral turpitude, fraud or misrepresentation.
 
5.   A material breach of your Restricted Covenant Agreement with WSI.

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EXHIBIT 99.1
WSI Industries Announces Leadership Transition
October 12, 2009—Minneapolis, MN— WSI Industries, Inc. (Nasdaq: WSCI) today announced that Benjamin Rashleger has been appointed as President and Chief Operating Officer. Michael Pudil will continue as Chief Executive Officer and Chairman of the Board for the Company. The Company entered into a new employment agreement with Michael Pudil that established a two year transition period that would provide the Company with the opportunity to proactively implement an orderly succession plan.
Michael J. Pudil, Chief Executive Officer, commented: “We are very pleased with the addition of Benjamin Rashleger. Over the past 16 years he has held various positions with Milltronics Manufacturing Company including President & CFO. Over this period, he helped guide the growth and positioned this high-tech machine tool manufacturer for continued success. Looking forward, I have tremendous confidence in Benjamin’s ability to implement the WSI growth strategy that takes full advantage of our strong financial position and established 60 year reputation in the contract machining industry.” In addition to Benjamin Rashleger, Paul Sheely, Chief Financial Officer, will continue to report directly to Michael Pudil.
WSI Industries, Inc. is a leading contract manufacturer that specializes in the machining of complex, high-precision parts for a wide range of industries, including avionics, aerospace and defense, energy, recreational vehicles, computers, small engines, marine, bioscience and instrumentation.
# # #
For additional information:
Michael J. Pudil (CEO) Paul D. Sheely (CFO)
763/295-9202
The statements included herein which are not historical or current facts are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Reform Act of 1995. There are certain important factors which could cause actual results to differ materially from those anticipated by some of the statements made herein, including the Company’s ability to retain current programs and obtain additional manufacturing programs, and other factors detailed in the Company’s filings with the Securities and Exchange Commission.