EXHIBIT 10.3
 

 
LOAN AGREEMENT
 

 
THIS LOAN AGREEMENT is made and entered into as of May 8, 2013, by and between
BMO Harris Bank N.A., a national banking association (“Lender”), and WSI
Industries, Inc., a Minnesota corporation (“Borrower”), and WSI Industries, Co.,
a Minnesota corporation and WSI Rochester, Inc., (jointly "Guarantors", or
individually, a "Guarantor").
 

 
W I T N E S S E T H:
 
WHEREAS, Lender has agreed to make a loan to Borrower of up to $4,200,000.00
(which includes the amount currently outstanding on the Original Note, and which
shall remain outstanding on and as a part of the Note, both as defined below) to
finance the construction of the Project.
 
NOW, THEREFORE, in consideration of the mutual premises and covenants herein
contained and other good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, the parties agree as follows:
 
1.      Definitions.  The following definitions shall apply to this Loan
Agreement:
 
1.1.              Business Day.  Business Day shall mean any day except a
Saturday, Sunday or a day on which banks in Chicago, Illinois are authorized or
required by law to close.
 
1.2.              Collateral Security Documents.  The Collateral Security
Documents shall include the following documents, each of which shall be in form
and substance acceptable to Lender and shall have been executed by Borrower or
the Guarantors in favor of Lender and dated as of the date hereof unless
otherwise noted:
 
1.2.1.           Amended and Restated Real Estate Mortgage, Security Agreement
and Financing Statement (“Mortgage”).
 
1.2.2.           Assignment of Leases and Rents ("Assignment of Rents").
 
1.2.3.            Guaranties executed by the Guarantors.
 
1.2.4.            UCC Financing Statement (Fixture Filing).
 
1.2.5.           The Collateral Security Documents shall also include all other
documents and instruments, at any time executed by Borrower or any other
individual or entity in favor of Lender, which expressly or impliedly evidence
or secure the Loan.
 
1.3.              Event of Default.  The term “Event of Default” is defined in
Section 7.1 hereof.
 
 
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1.4.              Guarantors.  The Guarantors are WSI Industries Co., a
Minnesota corporation, and WSI Rochester, Inc., a Minnesota corporation.
 
1.5.              Loan.  The Loan is the existing mortgage loan which is being
amended to the new $4,200,000.00 loan, which includes the current outstanding
principal balance of the existing mortgage loan in the amount of $1,048,004.85,
and the additional proceeds to be advanced in the amount of $3,151,995.18 which
are to be used in accordance with this Loan Agreement.
 
1.6.               Loan Documents.  The Loan Documents shall include, but not be
limited to, the Collateral Security Documents, the Note, , and this Loan
Agreement.
 
1.7                      Municipality.  The Municipality is the City of
Monticello, Minnesota
 
1.8                      Note.  The Note is the $4,200,000.00 Amended and
Restated Promissory Note executed by Borrower in favor of Lender on a date even
herewith.
 
1.9                      Original Note.  The Original Note is the existing that
certain Promissory Note dated May 3, 2004 in the original principal amount of
$1,360,000.00, with a current principal balance of $1,048,004.85, and which
shall be amended and restated in its entirety by the Note.
 
1.10                    Permitted Liens and Encumbrances.  Permitted Liens and
Encumbrances shall be those liens and encumbrances set forth on Exhibit B to the
Mortgage.
 
1.11                    Project.  The Project is the construction and completion
of a 47,945 square foot addition to Borrower's building including all fixtures,
landscaping, parking areas, and other work necessary to render the Project
usable and complete for its intended purposes, which Project shall be located at
the Real Property and commonly known as 213 Chelsea Road, Monticello, Minnesota
55362.
 
1.12                    Project Completion Escrow.  The sum of $303,622.30, to
be withheld from the proceeds of the Loan and to be deposited with the Title
Insurance Company to be used for completion of landscaping, parking lot repaving
and miscellaneous matters, to be held and disbursed pursuant to the terms of a
separate agreement between the Borrower and the Title Insurance Company.
 
1.13                    Real Property.  The Real Property is the real property
described on Exhibit A attached hereto.
 
1.14                    Secured Assets.  The Secured Assets shall mean all of
the real and personal property of Borrower as described in the Mortgage.
 
1.15                    Title Commitment.  The Title Commitment shall be the
title commitment referenced in Section 2.6 hereof.
 
1.16                    Title Insurance Company.  The Title Insurance Company
shall be First American Title Insurance Company, as previously approved by
Lender.
 
2.           Conditions Precedent.  This Loan Agreement shall become effective
upon satisfaction of the conditions set forth in this Section.
 
2.1.              Loan Documents.  Borrower, Guarantors and all other applicable
parties shall have executed and delivered each of the Loan Documents they are
required to execute and deliver.
 
 
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2.2.              Borrower’s Organizational Documents.  Borrower shall have
furnished to Lender copies, certified to Lender by the Secretary of Borrower to
be true and correct as of the date hereof, of the Articles of Incorporation and
Bylaws of the Borrower, plus any amendments thereto, a Resolution authorizing
the transaction and the execution and delivery of the applicable Loan Documents
and a Certification and Incumbency Certificate.  Borrower shall also deliver a
satisfactory Good Standing Certificate for Borrower as issued by the Secretary
of State for the State of Minnesota.
 
2.3.              Guarantor’s Organizational Documents.  Guarantors shall have
furnished to Lender copies, certified to Lender by the Secretary of each
Guarantor to be true and correct as of the date hereof, of the Articles of
Incorporation and Bylaws of the Guarantors, plus any amendments thereto, a
Resolution authorizing the transaction and the execution and delivery of the
applicable Loan Documents and a Certification and Incumbency
Certificate.  Guarantors shall also deliver a satisfactory Good Standing
Certificate for each Guarantor as issued by the Secretary of State for the State
of Minnesota
 
2.4.              [RESERVED]
 
2.5.              Appraisal.  Lender shall have received an appraisal, conducted
by an appraiser acceptable to Lender who meets regulatory requirements, showing
that the Project and the Real Property, as of the date of completion of
construction pursuant of the Project, shall have a market value equal to at
least $5,250,000.00.  The appraisal must be in a form, content and substance
acceptable to Lender, in its sole discretion, and shall meet Lender’s minimum
appraisal standards and all regulatory requirements.  Lender reserves the right,
at such time(s) as Lender may deem necessary or desirable, to have the Project
and the Real Property re-appraised including, but not limited to, upon any
change in use thereof, upon any change in entitlements or anticipated
entitlements (e.g. zoning or other land use approvals) to the Real Property,
upon any change in easements or anticipated easements benefitting or burdening
the Real Property during the term of the Loan, upon substantial completion of
construction of the Project pursuant to the Plans and Specifications and in
accordance with the terms of this Loan Agreement, and to exercise the remedies
provided for in Section 9.2 hereof.  Insurance.  Borrower shall have furnished
to Lender the policies, or certificates evidencing such policies, of insurance
required in Section 5.4. of this Loan Agreement.
 
2.6.              Title Insurance.  Lender shall have obtained, at Borrower’s
expense, a commitment for an ALTA form of loan policy of title insurance with
“gap” coverage (if applicable in the State in which the Project is located) and
such endorsements as reasonably required by Lender, issued by the Title
Insurance Company, in form and content satisfactory to Lender, in its sole
discretion, to the effect that the Title Insurance Company will issue its loan
policy of title insurance in the amount of $4,200.000.00, insuring that Borrower
owns fee simple title to the Real Property  and insuring that the Mortgage
constitutes a first and valid lien on the Real Property, subject only to the
Permitted Liens and Encumbrances (and with the deletion of all standard title
exceptions with so-called extended coverage).  In connection therewith, Borrower
shall have executed such owner’s affidavits and other affidavits and statements
which may be required by the Title Insurance Company to issue the loan policy in
the form required by this Section.  The underwriter for which the Title
Insurance Company is issuing the loan policy of title insurance described above
shall have issued a closing protection letter for the benefit of Lender, in form
and content reasonably acceptable to Lender, insuring the Title Insurance
Company’s actions in closing the transactions contemplated by this Loan
Agreement.
 
 
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2.7.              Loan Fee.  Borrower shall have paid to Lender the sum of $0.00
as a loan fee, which fee shall be non-refundable to Borrower.
 
2.8.              UCC Search.  Lender shall have obtained, at Borrower’s
expense, UCC Searches as deemed necessary or appropriate by Lender, certified by
the Secretary of State  of the State of Minnesota and Wright County, Minnesota,
or issued by a reputable UCC lien search company acceptable to Lender in its
sole and absolute discretion, which state that there are no liens or
encumbrances affecting the Secured Assets (or, if there are liens or
encumbrances affecting the Secured Assets, Lender shall have approved of the
same).
 
2.9.              Compliance with Laws.  Borrower shall have provided Lender
with satisfactory evidence (including, if required by Lender, an opinion of
Borrower’s counsel) of compliance by the Real Property and the Project with
respect to both present and contemplated future use, of all applicable laws,
regulations, ordinances and codes, including, but not limited to, zoning and
subdivision laws, regulations, ordinances and codes, and comprehensive land use
plans, laws, regulations, ordinances and codes and evidence (including, if
required by Lender, an opinion of Borrower’s counsel) that all entitlements and
governmental approvals necessary for the design and construction of the Project
in accordance with the Plans and Specifications have been obtained.  All
approvals shall be in continuous effect without lapse so as to permit the
construction of the Project without the necessity of reapplying for or
re-obtaining any such approvals.
 
2.10.              [RESERVED].
 
2.11.              [RESERVED]
 
2.12.              [RESERVED].
 
2.13.              Licenses, Permits and Approvals.  Borrower shall have
delivered to Lender, and Lender shall have the right to approve or disapprove,
in its sole discretion, copies of all governmental and quasi-governmental
approvals and permits required to operate the Project including, but not limited
to, all building permits and certificates of occupancy issued by the
Municipality, as requested by Lender.
 
2.14                      [RESERVED] .
 
2.15                      Utilities.  Borrower shall have delivered to Lender
evidence reasonably satisfactory to Lender that all utility services necessary
for the development, construction and operation of the Project (including, but
not limited to, sanitary sewer, water, electricity, gas and other similar
utilities) are available to the Real Property in sufficient capacity to serve
the Project and that Borrower will be permitted to directly connect the Project
to all such utility services without unusual expense.
 
2.16                      Survey.  Borrower shall have furnished to Lender (or
Lender shall have obtained, at Borrower’s expense) an ALTA "as-built" survey
prepared according to the current ALTA/ACSM Minimum Standard Detail Requirements
by a licensed surveyor satisfactory to Lender and certified to Lender and the
Title Insurance Company, which shows (i) the as-built foundation of the Project,
the existing improvements, driveways and fences, if any, on the Real Property;
(ii) all easements and roads or right of ways and setback lines, if any,
affecting the Real Property; (iii) the dimensions, boundaries and square footage
of the Real Property; (iv) no encroachments by the Project and the existing
improvements on the Real Property or by improvements located on the adjoining
property exist; (v) whether or not the property appears on any U.S. Department
of Housing and Urban Development Flood Insurance Boundary Map and, if so,
further state the map number and whether or not the property appears in the
“Flood Hazard” shown on the map; and (vi) such additional information that may
be required by Lender, in its sole discretion (the “Survey Requirements”).
 
 
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2.17                      [RESERVED].
 
2.18                      [RESERVED].
 
2.19                      [RESERVED].
 
2.20                      Leases.   There are no current Leases to the Real
Property.  With respect to any Leases entered into after the date hereof,
Borrower shall comply with the requirements of of the Mortgage.
 
2.21                      [RESERVED]
 
3.           [RESERVED]
 
4.           Representations and Warranties.  Borrower represents, warrants and
certifies to Lender that:
 
4.1.              Organizational Documents.  Borrower and Guarantors shall at
all times be duly organized, validly existing, and in good standing under and by
virtue of the laws of the State of Minnesota.  Borrower is duly organized to
transact business in all other States in which Borrower is doing business,
having obtained all necessary filings, governmental licenses and approvals for
each state in which Borrower is doing business.  Specifically, Borrower is, and
at all times shall be, duly qualified as a foreign corporation in all States in
which the failure to so qualify would have a material adverse effect on its
business or financial condition.  Borrower has the full power and authority to
own its properties and to transact business in which it is presently engaged or
proposes to engage.  Borrower maintains its principal office at 213 Chelsea
Road, Monticello, MN 55362.  Unless Borrower has designated otherwise in
writing, the principal office is the office at which Borrower keeps its books
and records including its records concerning the Project.  Borrower will notify
Lender prior to any change in the location of Borrower’s state of organization,
principal place of business, or Borrower’s name and pay all of Lender’s costs
and expenses as a result thereof including, but not limited to, costs and
expenses of correcting any UCC filings.  Borrower shall do all things necessary
to preserve and to keep in full force and effect its existence.
 
4.2.              Execution of Loan Documents.   The Loan Documents have been
duly executed and delivered by Borrower and the Guarantors, so that such
documents constitute the legally enforceable obligations of Borrower and the
Guarantors in accordance with their respective terms.
 
4.3.              Financial Statements.  All financial statements, information
and other data furnished by Borrower and the Guarantors to Lender are complete
and correct in all material respects and disclose all contingent obligations
which are material individually or in the aggregate.  Such financial statements
accurately and fairly represent each applicable party’s financial condition and
operating results as of such date and since such date there has been no material
change in Borrower’s or any of the Guarantors’ financial condition or results of
operations sufficient to materially impair the ability to repay the Loan.
 
 
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4.4.              Operation of Real Property and Project.  Borrower has examined
and is familiar with all easements, covenants, conditions, restrictions,
reservations, building laws, regulations, zoning and land use ordinances, and
federal, state and local requirements affecting the Project.  The Project will
at all times and in all respects conform to and comply with the requirements of
such easements, covenants, conditions, restrictions, reservations, building
laws, regulations, zoning and land use ordinances, and federal, state and local
requirements.  The present and proposed operation and use of the Real Property
and the Project do not violate any applicable law, ordinance, code, rule,
regulation, order or any restrictive covenant or any similar zoning or land use
restriction binding on the Real Property or the Project.  The Real Property is a
legal parcel lawfully created in full compliance with all subdivision laws and
ordinances.  Borrower has no knowledge of any Native American or other
archaeological ruins, discoveries or specimens existing on the Real Property.
 
4.5.              Ownership of Real Property.  As of the date hereof, and at all
times thereafter until the Loan has been paid in full, Borrower will be the fee
simple owner of the Real Property and Secured Assets, free and clear of all
liens, encumbrances, claims, leases, rental agreements, occupancy agreements and
other similar items except for the Permitted Liens and Encumbrances and the
Leases.
 
4.6.              No Default.  Borrower is not now in default under any
agreement to which it is a party, the effect of which would adversely affect
performance by such parties of their obligations pursuant to the terms and
provisions of the Loan Documents.  Neither the execution and delivery of the
Loan Documents nor any other document executed and delivered by Borrower in
connection with the Loan, nor the consummation of the Loan, nor compliance with
the terms and provisions thereof, violate any presently existing law, order,
writ, injunction or decree of any court or governmental department, commission,
board, bureau, agency or instrumentality or constitutes a default under any
indenture, mortgage, deed of trust, agreement or contract of any kind to which
such parties may be bound.
 
4.7.              Utilities.  All water, sewer, electric, telephone and drainage
facilities and all other utilities required by law and by the normal operation
of the Project have been installed to the boundary lines of the Real Property,
are connected pursuant to valid permits, the cost of extending and connecting
such utilities to the Real Property is stated in the Final Certified
Construction Budget, and are adequate to fully comply with all requirements of
law and to serve the Project for its intended use.
 
4.8.              Access.  All roads, easement areas and other modes of ingress
and egress necessary for the full utilization of the Project have either been
completed and Borrower has the legal right to use such roads, easement areas or
modes of access; or any roads, easement areas or modes of access not so
completed will be completed in accordance with the Plans and Specifications and
sufficient funds are provided for in the Final Certified Construction Budget to
complete such roads, easement areas or modes of access.
 
4.9.              Leases.  There are currently no Leases with respect to the
Real Property.
 
4.10.            No Legal Proceedings.   There are no actions, suits or
proceedings pending or threatened against Borrower, any Guarantor, the Secured
Assets, the Project or the Real Property before any court or any governmental,
administrative, regulatory, adjudicatory or arbitrational body or agency of any
kind which will adversely affect performance by Borrower or any Guarantor of
their respective obligations pursuant to the provisions of the Loan Documents.
 
 
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4.11.              Insurance.  Borrower has not received, and has no knowledge
of any other party having received, any notice from any insurer of any defects
or inadequacies in the Real Property or the Project which would adversely affect
the insurability of the Real Property or the Project.
 
4.12.              Liens and Encumbrances.  Except for the Permitted Liens and
Encumbrances, Borrower has not taken, suffered or permitted any action, the
effect of which would be to establish or cause the inception or priority of any
construction or materialman’s lien, statutory or otherwise, or other lien,
charge or encumbrance upon the Real Property or the Secured Assets to be prior
or superior to the liens and security interests of the Collateral Security
Documents.  No bill of sale, security agreement, financing statement or other
instrument creating a security interest to secure the repayment of debt (except
those in favor of Lender) has been executed by Borrower with respect to the
Project or the Real Property.
 
4.13.              Insolvency.  Neither Borrower nor any of the Guarantors have
filed any petition nor has any petition been filed against any such party in
bankruptcy or insolvency or reorganization or for the appointment of a receiver
or trustee or for the arrangement of debts, nor has any such party or the Real
Property been the subject of such action, nor has such action been threatened by
or against any such party and/or the Real Property.  Neither Borrower nor any of
the Guarantors are insolvent nor will they be rendered insolvent by the
consummation of the Loan.
 
4.14.              [RESERVED]
 
4.15.              Approvals.  Borrower has obtained all approvals from all
governmental and quasi-governmental authorities and any applicable private party
necessary or required for the construction and operation of the Project.
 
5.           Covenants of Borrower.  While this Loan Agreement is in effect, and
until the Loan has been repaid in full, Borrower shall comply with the covenants
set forth below:
 
5.1.              [RESERVED].
 
5.2.              [RESERVED].
 
5.3.              Liens.  Borrower shall not create or permit to be outstanding
any mortgage, encumbrance or lien of any nature on the Real Property or the
Secured Assets except the Permitted Liens and Encumbrances.  In addition,
Borrower shall: (i)  cause all claims for labor done and materials and services
furnished in connection with the Project to be fully paid and discharged in a
timely manner;  (ii)  diligently file or procure the filing of a valid notice of
completion of construction, or such comparable document as may be permitted
under applicable lien laws;  (iii)  diligently file or procure the filing of a
notice of cessation, or such comparable document as may be permitted under
applicable lien laws, upon the happening of cessation of labor on the Project
for a continuous period of thirty (30) days or more, and  (iv)  take all
reasonable steps necessary to remove all claims of liens against the Project,
the Real Property, or any part of the collateral or improvements, or any rights
or interests appurtenant to the collateral or improvements on the Real
Property.  Upon Lender's request, Borrower shall make such demands or claims
upon or against laborers, materialmen, subcontractors, or other persons who have
furnished or claim to have furnished labor, services, or materials in connection
with the Project, which demands or claims shall under the laws of the State of
Minnesota require diligent assertions of lien claims upon penalty of loss or
waiver thereof.  If any lien is created, Borrower shall, within ten (10) days
after the filing of any claim of lien that is disputed or contested by Borrower,
cause such lien to be removed of record or provide Lender with a surety bond
issued by a surety acceptable to Lender sufficient to release the claim of lien
or deposit with Lender an amount satisfactory to Lender for the possibility that
the contest will be unsuccessful.  If Borrower fails to remove any lien on the
collateral or the Project or provide a bond or deposit pursuant to this
provision, Lender may pay such lien, or may contest the validity of the lien,
and Borrower shall pay all costs and expenses of such contest, including
Lender's reasonable attorneys' fees.
 
 
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5.4.              Insurance.  Borrower shall at all times maintain in effect (or
cause to be maintained in effect) and furnish Lender with insurance policies
(or, if acceptable to Lender, certificates evidencing such policies) and proof
of payment of premiums as follows:
 
5.4.1.           General Insurance Requirements.  Borrower shall maintain or
cause to be maintained all insurance coverages as required pursuant to the
Mortgage.
 
5.4.2.           Flood Insurance.  If any portion of the Real Property is
located within a flood plain, Borrower shall maintain or cause to be maintained
Flood Insurance in amounts acceptable to Lender in Lender’s discretion.
 
5.4.3.           Worker’s Compensation.  Borrower shall cause appropriate
Worker’s Compensation coverage and Employer’s Liability insurance to be
maintained in force at all times during the term of the Note, and upon request
of Lender, shall furnish Lender evidence of same.
 
5.4.4.           Construction Insurance.  During the process of any
construction, Borrower shall maintain policies of All Risk Builder’s Risk
Completed Value insurance with all endorsements which are generally maintained
by prudent real estate developers or real property owners covering the Project
in at least the amount of the estimated cost to complete the Project, with
lender loss payable and mortgagee endorsements in favor of Lender or its
assigns.
 
5.4.5.           Rent Loss Insurance.  None.
 
5.4.6.           Additional Insurance Requirements.  The insurance maintained as
required hereunder shall bear a standard noncontributory first mortgagee
endorsement in favor of Lender or its assigns, shall name Lender as “Mortgagee”
and “Lender Loss Payee”, and shall provide that all proceeds under such policies
shall be paid to Lender and losses which apply solely to the Project shall be
disbursed in accordance with the provisions of the Mortgage.  All insurance
policies shall be written by companies having a Best’s rating of “A” and a
financial size category rating of Class X or larger.  All insurance policies
shall provide that they may not be cancelled without at least thirty (30) days
written notice of intention to cancel given by the applicable insurance company
to Lender.
 
 
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5.5.              Compliance with Laws.  Borrower shall comply, and shall cause
all tenants under the Leases, if any, to comply, with the requirements of all
applicable environmental, health, safety and sanitation laws, rules, regulations
and orders of regulatory and administrative authorities.  Borrower will also
comply, and shall cause all tenants under the Leases, if any, to comply, with
all other laws, rules, regulations and orders which are applicable to the Real
Property, the Project or Borrower including, but not limited to, those relating
to the Americans With Disabilities Act and the Fair Housing Act.  Borrower shall
maintain all required licenses, permits and approvals with respect to the
construction of the Improvements and the operation of the Project.
 
5.6.              Prohibition Against Fundamental Changes.  Borrower shall not
enter into any transaction of merger, consolidation or amalgamation; liquidate,
wind up or dissolve itself (or suffer any liquidation or dissolution); convey,
sell, lease, transfer or otherwise dispose of, in one transaction or a series of
transactions, all or a substantial part of its business, Real Property, Secured
Assets or any other assets; acquire by purchase or otherwise all or
substantially all the business or assets of, or membership interests or other
evidences of beneficial ownership of, any entity.  Except as expressly permitted
in the Mortgage, no interest of Borrower or any other form of beneficial
ownership of Borrower may be sold, transferred or otherwise disposed of during
the term of the Loan without the prior written consent of Lender, which consent
may be withheld for any reason.
 
5.7.              Expenses and Indemnification.  Borrower shall pay upon demand
to Lender all out-of-pocket expenses incurred by Lender and all reasonable:
(i) title insurance fees; (ii) survey and other consultants’ fees and expenses;
(iii) attorneys’ fees; (iv) filing fees and taxes; (v) inspection fees;
(vi) insurance premiums (to the extent not paid directly by Borrower);
(vii) engineer and other consultants’ fees; (viii) appraisal fees, and all other
similar costs and expenses relating in any manner to the Loan and the
enforcement of Lender’s rights and remedies pursuant to the Loan
Documents.  Lender is hereby authorized to make disbursements from the Loan
proceeds to pay the amount set forth in the foregoing sentence.  Borrower hereby
agrees to hold and save Lender harmless and indemnify Lender for, from and
against all claims, liabilities, damages, losses or expenses (including
reasonable attorneys’ fees) of any kind incurred by Lender arising from or out
of the use, occupancy, or possession of the Real Property or otherwise or in any
matter related to this Loan or the enforcement of Lender’s rights and remedies
pursuant to the Loan Documents.
 
5.8.              Financial Covenants.
 
5.8.1           Minimum Net Worth.  So long as the Note shall remain unpaid or
the Bank shall have any Commitment hereunder, the Borrower will maintain, during
and at the end of each fiscal quarter end, Net Worth at an amount not less than
Eight Million Five Hundred Thousand and no/100 Dollars ($8,500,000.00).  For
purposes hereof, "Net Worth" means the aggregate of capital and surplus of the
Borrower, all determined in accordance with generally accepted accounting
principles.

5.8.2           Ratio of Debt to Tangible Net Worth.  So long as the Note shall
remain unpaid or the Bank shall have any Commitment hereunder, the ratio of the
Borrower's Debt to Tangible Net Worth shall not exceed 2.25 to 1 measured at the
end of each fiscal quarter end basis.
 
 
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For purposes hereof, "Debt" means (i) all items of indebtedness or liability
which in accordance with generally accepted accounting principles would be
included in determining total liabilities as shown on the liabilities side of a
balance sheet as at the date as of which Debt is to be determined and (ii)
indebtedness secured by any mortgage, pledge, lien or security interest existing
on property owned by the Person whose Debt is being determined, whether or not
the indebtedness secured thereby shall have been assumed, and (iii) guaranties,
endorsements (other than for purposes of collection in the ordinary course of
business) and other contingent obligations in respect of, or to purchase or
otherwise acquire indebtedness of others; and "Tangible Net Worth" of any Person
means the excess of:

(a)          the tangible assets of such Person, which, in accordance with
generally accepted accounting principles, are tangible assets, after deducting
adequate reserves in each case where, in accordance with generally accepted
accounting principles, a reserve is proper, less

(b)         all Debt of such Person;

provided, however, that (i) inventory shall be taken into account on the
basis  of the cost or current market value, whichever is lower, (ii) in no event
shall there be included as such tangible assets patents, trademarks, trade
names, copyrights, licenses, good will, deferred taxes, prepaid expenses,
deferred charges or treasury stock or any securities or Debt of such Person or
any other securities unless the same are readily marketable in the United States
of America or entitled to be used as a credit against Federal income tax
liabilities, (iii) securities included as such tangible assets shall be taken
into account at their current market price or cost, whichever is lower, and (iv)
any write-up in the book value of any assets shall not be taken into account.

5.8.3      Quarterly Fixed Charge Coverage Ratio.  So long as the Note shall
remain unpaid or the Lender shall have any Commitment hereunder, Borrower shall
maintain a quarterly Fixed Charge Coverage Ratio, tested quarterly as of the end
of each fiscal quarter of Borrower (based upon a fiscal year end of the last
Sunday in August, and fiscal quarter ends on the last Sunday of each of
November, February, May and August) for the most recently-ended four fiscal
quarters of Borrower preceding each such testing date, of not less than 1.20 to
1 as of the end of each such testing period, beginning on fiscal quarter ended
on the last Sunday of February in 2013, determined in accordance with generally
recognized accounting principles consistently applied.
The term “Fixed Charge Coverage Ratio” means Borrower's earnings after taxes
plus interest expense, plus taxes, plus depreciation plus amortization minus
unfinanced capital expenditures (but excluding from unfinanced capital
expenditures an amount of up to $600,000 contributed by Borrower to Borrower's
2012-2013 building expansion) minus dividends minus taxes paid in cash divided
by scheduled principal and interest payments due on all Debt of the Borrower for
such testing period...

5.9.              Use of Proceeds.  The proceeds of the Loan shall be used to
reimburse Borrower for actual expenses incurred by or on behalf of Borrower for
construction of the Project.
 
 
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5.10.            Financial Statements. The Borrower and Guarantors will deliver
to Lender:

5.10.1           As soon as available, and in any event within ninety (90) days
after the end of each fiscal year of the Borrower and Guarantors, a copy of the
financial statements of the Borrower and Guarantors audited by independent
certified public accountants selected by the Borrower and Guarantors and
acceptable to the Bank, which shall include the balance sheet of the Borrower
and Guarantors as at the end of such fiscal year and the related statements of
income, retained earnings and changes in financial position of the Borrower and
Guarantors for the fiscal year then ended, all in reasonable detail and all
prepared in accordance with generally accepted accounting principles applied on
a consistent basis and accompanied by a certificate of said officer stating (i)
that such financial statements have been prepared in accordance with generally
accepted accounting principles applied on a basis consistent with the accounting
practices reflected in the annual financial statements previously provided to
Lender, and (ii) whether or not he has knowledge of the occurrence of any Event
of Default hereunder or of any event not theretofore reported and remedies which
with notice or lapse of time or both would constitute such an Event of Default
and, if so, stating in reasonable detail the facts with respect thereto and
(iii) all relevant facts in reasonable detail to evidence, and the computations
as to, whether or not the Borrower is in compliance with requirements set forth
in Sections 5.8 hereof.

5.10.2           As soon as available and in any event within forty-five (45)
days after the end of each quarter, balance sheets of the Borrower and
Guarantors as at the end of such quarter and related statements of earnings and
retained earnings of the Borrower and Guarantors for such quarterly period and
for the year to date, in reasonable detail and stating in comparative form the
figures for the corresponding date and period in the previous year, all prepared
in accordance with generally accepted accounting principles applied on a basis
consistent with the account practices reflected in the annual financial
statements referred to in Section 5.10.1 and certified by the chief financial
officer of the Borrower and Guarantors; subject, however, to year-end audit
adjustments, and accompanied by a certificate of said officer stating (i) that
such financial statements have been prepared in accordance with generally
accepted accounting principles applied on a basis consistent with the accounting
practices reflected in the annual financial statements referred to in Section
5.10.1, and (ii) whether or not he has knowledge of the occurrence of any Event
of Default hereunder or of any event not theretofore reported and remedies which
with notice or lapse of time or both would constitute such an Event of Default
and, if so, stating in reasonable detail the facts with respect thereto and
(iii) all relevant facts in reasonable detail to evidence, and the computations
as to, whether or not the Borrower and Guarantors are in compliance with
requirements set forth in Sections 5. 8.

5.10.3           As soon as possible after such occurrence, Borrower and
Guarantors shall provide the Bank with notice of any amendment of their Articles
of Incorporation or of any material change in the Borrower or Guarantor or its
or their operations; and

5.10.4           Such other information respecting the financial condition and
results of operations of the Borrower or any Guarantor as the Bank may from time
to time reasonably request.
 
5.11.              Leases.  Borrower acknowledges and agrees that Borrower’s
right to modify, amend, supplement, terminate or cancel any of the Leases, or
enter into any new Leases, shall be governed by the Mortgage
 
5.12.              [RESERVED].
 
5.13                      Operations.  Borrower shall maintain executive and
management personnel with substantially the same qualifications and experience
as the present executive and management personnel, shall provide written notice
to Lender of any change in executive and management personnel, and shall conduct
its business affairs in a reasonable and prudent manner.
 
 
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5.14                      Notice of Defaults.  Borrower will promptly notify
Lender in writing of the occurrence of any default or Event of Default,
specifying the nature and existence of such default or Event of Default and what
action Borrower is taking or proposes to take with respect thereto.  If any
person shall give any notice or take any other action in respect of a claimed
default (whether or not constituting an Event of Default) under this Loan
Agreement or under any note, evidence of indebtedness, indenture or other
obligation to which or with respect to which Borrower is a party or obligor,
whether as principal or surety, and such default would permit the holder of such
note or obligation or other evidence of indebtedness to accelerate the maturity
thereof, which acceleration would have a material adverse effect on Borrower,
Borrower shall forthwith give written notice thereof to Lender, describing the
notice or action and the nature of the claimed default.
 
5.15                      Notification of Claims Against Collateral.  Borrower
will, immediately upon becoming aware thereof, notify Lender in writing of any
setoff, claims, withholdings or other defenses to which any of the collateral,
or the rights of Lender with respect to the collateral, are subject.
 
5.16                      Notice of Nonpayment.  Borrower will immediately
notify Lender in writing if Borrower receives any notice, whether oral or
written, from any laborer, subcontractor or materialman to the effect that such
laborer, subcontractor or materialman has not been paid when due for any labor
or materials furnished in connection with the construction, renovation, repair
or replacement of any Improvements located on, or any other work performed at,
the Real Property.
 
5.17                      Notice of Legal Proceedings.  Borrower will give
notice to Lender in writing within fifteen (15) days of becoming aware of any
litigation or proceedings threatened in writing or any pending litigation and
proceedings affecting the Real Property, the Project, the Secured Assets or
Borrower or to which Borrower is or is to become a party involving an uninsured
claim against Borrower that could reasonably be expected to have a materially
adverse effect on Borrower and stating the nature and status of such litigation
or proceedings.  Borrower will give notice to Lender, in writing, in form and
detail satisfactory to Lender, within ten (10) days of any judgment not covered
by insurance, final or otherwise, against Borrower in an amount in excess of
Fifty Thousand Dollars ($50,000.00).
 
5.18                      Notice of Tenant Actions. Borrower will give written
notice to Lender at least ten (10) days prior to the commencement of, and again
on the date of, occupancy of the Improvements by any future tenant under a
Lease, stating the name of the tenant, the date of occupancy, and the area so
occupied.  Borrower will also give written notice to Lender within ten (10) days
after any tenant under a Lease vacates its premises (whether pursuant to the
expiration of the term or otherwise), stating the name of the tenant, the date
the premises were vacated, and the area so vacated.  In addition, Borrower will
give written notice to Lender within ten (10) days after any tenant under a
Lease fails to take occupancy of its premises as provided in such Lease, and
within ten (10) days after the occurrence of any default by tenant or
Borrower/landlord under such Lease.
 
6.           Letters of Credit.  Lender shall not be required to issue any
letters of Credit for the account of Borrower in connection with the Project.
 
7.           Events of Default.
 
 
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7.1.              Any of the following events shall constitute an event of
default (“Event of Default”) under this Loan Agreement:
 
7.1.1.           Default Pursuant to Note.  Borrower shall default in the
payment of principal or interest due under the Note or any other payments due
pursuant to the Loan Documents.
 
7.1.2.           Default Pursuant to Loan Documents.  Except for a default
pursuant to Section 7.1.1 above, there shall be a failure in the performance or
observance of any covenants or conditions required to be performed or observed
by Borrower or any of the Guarantors, if applicable, under the terms of the Loan
Documents, and such failure continues beyond any applicable cure period (if
any).
 
7.1.3.           Breaches.  Any representation or warranty made by Borrower or
any of the Guarantors, if applicable, in the Loan Documents or as part of the
Loan or in any certificate or document furnished as part of the Loan shall prove
untrue in any material respect on the date as of which they were made or as of
the date on which they were to be effective; or any financial statement or
financial information delivered pursuant to this Loan Agreement is false or
misleading in any material respect as of the date thereof.
 
7.1.4.           Insolvency.  Either Borrower or any of the Guarantors, if
applicable, shall admit in writing their inability to pay its debts or shall
make an assignment for the benefit of its creditors; or shall be adjudicated a
bankrupt; or shall file a voluntary petition in bankruptcy or to effect a plan
or other arrangement with creditors, or to liquidate assets of either Borrower
or any of the Guarantors, if applicable, under court supervision; or shall have
applied for the appointment of a receiver, trustee or custodian for any of their
assets; or a trustee, receiver or custodian shall have been appointed for any
assets of Borrower or any of the Guarantors, if any
 
7.1.5.           Damage to Real Property or Project.  If the improvements on the
Real Property or Secured Assets are, in the reasonable judgment of Lender,
materially injured or destroyed and Borrower does not take prompt action to
collect insurance proceeds and/or commence restoration.
 
7.1.6.           Inspection of Real Property.  If Lender is not permitted, at
all reasonable times upon prior reasonable notice as required under the
Mortgage, to enter and inspect the Real Property, Project and the Secured
Assets.
 
7.1.7.           Warrants and Attachments.  Any warrant, attachment, execution
or other writ shall be issued or levied upon the Real Property or the Secured
Assets or any property, real or personal, owned by Borrower or any Guarantor (if
applicable) and shall remain undischarged, unstayed or unbonded for a period in
excess of sixty (60) days.
 
7.1.8.           [RESERVED]
 
7.1.9.           Material Contracts.  If any contract, lease or agreement which
is material to Borrower’s business is modified, amended or supplemented without
Lender’s written consent or any of the Leases or any such contract, lease or
agreement are terminated or a breach or an event of default occurs under the
Leases or any such contract, lease or agreement.
 
7.1.10.         [RESERVED].
 
 
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7.1.11.         Expiration of Permits or Approvals.  If any building permit,
license or similar approval of any governmental authority required in connection
with the Project is not maintained in full force and effect or is canceled and
not reinstated within thirty (30) days of such cancellation or if any notice of
commencement required under applicable law, if any, is terminated or expires.
 
7.1.12          Default Under Other Obligations.  Any material event or
condition of default (however defined) by Borrower shall occur and the
applicable cure period, if any, shall have expired, in any promissory note or
any agreement between Borrower and the Lender, including but not limited to that
certain Amended and Restated Promissory Note, and that certain Loan Agreement,
both dated as of the same dated as of February 1, 2011, as amended, or any
document or agreement executed in connection therewith.

7.2.              Occurrence of an Event of Default.  Upon the occurrence of an
Event of Default and the continuance thereof beyond any applicable cure period,
unless such Event of Default is subsequently waived in writing by Lender, Lender
shall be entitled, at the option of Lender, to exercise any or all of the
following rights and remedies
 
7.2.1.           Suspend Disbursements.  Lender may suspend its obligation to
disburse any undisbursed proceeds of the Loan.
 
7.2.2.           Accelerate Payments.  Lender may declare the entire unpaid
principal balance due pursuant to the Note to be immediately due and payable,
together with accrued and unpaid interest, without further notice to or demand
on Borrower.  Notwithstanding the foregoing, if Borrower or any of the
Guarantors, if any, becomes insolvent, makes an assignment for the benefit of
its creditors, becomes the subject of an “order for relief” within the meaning
of the U.S. Bankruptcy Code, files a petition in bankruptcy, or for
reorganization, is adjudged bankrupt, has filed against them an involuntary
petition pursuant to the U.S. Bankruptcy Code or has a receiver, trustee,
custodian or a liquidator appointed to take control of any of their real or
personal property, then the entire unpaid principal balance due pursuant to the
Note and all accrued and unpaid interest thereon shall automatically and without
the option of Lender become immediately due and payable.
 
7.2.3.           [RESERVED].
 
7.2.4.           Other Remedies.  Lender may exercise all enforcement remedies
specified or permitted in the Collateral Security Documents or any remedy
available to Lender at law or in equity.
 
7.3.              [RESERVED]
 
7.4.              Setoff.  To the extent permitted by applicable law, Lender
reserves a right of setoff in all Borrower’s accounts with Lender (whether
checking, savings, or other account).  This includes all accounts Borrower, all
accounts Borrower may open in the future.  However, this does not include any
IRA or Keogh accounts, or any trust accounts for which setoff would be
prohibited by law.  Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on the indebtedness against
any and all such accounts, and, at Lender’s option, to administratively freeze
all such accounts to allow Lender to protect Lender’s charge and setoff rights
provided in this Section.
 
 
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8.           Liability; Limitations; Indemnification.
 
8.1.              [RESERVED].
 
8.2.              No Joint Venture.  The relationship between Borrower and
Lender created by this Loan Agreement is strictly a debtor and creditor
relationship and not fiduciary in nature, nor is the relationship to be
construed as creating any partnership or joint venture between Lender and
Borrower or any contractor. Lender is not an agent or representative of
Borrower.  This Loan Agreement does not create a contractual relationship with
and shall not be construed to benefit or bind Lender in any way or create any
contractual duties by Lender to any contractor, subcontractor, materialman,
laborer, or any other person.  Borrower is exercising Borrower's own judgment
with respect to Borrower's business.  All information supplied to Lender is for
Lender's protection only and no other party is entitled to rely on such
information.  There is no duty for Lender to review, inspect, supervise or
inform Borrower of any matter with respect to Borrower's business.  Lender and
Borrower intend that Lender may reasonably rely on all information supplied by
Borrower to Lender, together with all representations and warranties given by
Borrower to Lender, without investigation or confirmation by Lender and that any
investigation or failure to investigate will not diminish Lender's right to so
rely.
 
8.3.              Indemnification.  Borrower agrees to indemnify, to defend and
to save and hold Lender harmless for, from and against any and all claims,
suits, obligations, damages, losses, costs and expenses (including, without
limitation, Lender's attorneys' fees, as well as Lender's architect's and
engineering fees), demands, liabilities, penalties, fines and forfeitures of any
nature whatsoever that may be asserted against or incurred by Lender, its
officers, directors, employees, and agents arising out of, relating to, or in
any manner occasioned by this Loan Agreement and the exercise of the rights and
remedies granted Lender under this, as well as by:  (i)  the ownership, use,
operation, construction, renovation, demolition, preservation, management,
repair, condition, or maintenance of any part of the Project;  (ii)  the
exercise of any of Borrower's rights collaterally assigned and pledged to Lender
hereunder;  (iii)  any failure of Borrower to perform any of its obligations
hereunder; and/or  (iv)  any failure of Borrower to comply with the
environmental and ERISA obligations, representations and warranties set forth
herein.  The foregoing indemnity provisions shall survive the cancellation of
this Loan Agreement, the completion of the Project and the repayment of the Loan
as to all matters arising or accruing prior to any such event and the foregoing
indemnity shall survive in the event that Lender elects to exercise any of the
remedies as provided under this Loan Agreement following default
hereunder.  Borrower's indemnity obligations under this Section shall not in any
way be affected by the presence or absence of covering insurance, or by the
amount of such insurance or by the failure or refusal of any insurance carrier
to perform any obligation on its part under any insurance policy or policies
affecting the Project and/or Borrower's business activities.  Should any claim,
action or proceeding be made or brought against Lender by reason of any event as
to which Borrower's indemnification obligations apply, then, upon Lender's
demand, Borrower, at its sole cost and expense, shall defend such claim, action
or proceeding in Borrower's name, if necessary, by the attorneys for Borrower's
insurance carrier (if such claim, action or proceeding is covered by insurance),
or otherwise by such attorneys as Lender shall approve.  Lender may also engage
its own attorneys at its reasonable discretion to defend Borrower and to assist
in its defense and Borrower agrees to pay the fees and disbursements of such
attorneys.
 
9.           Additional Matters.
 
 
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9.1.              Heirs, Assigns, Waiver, Etc.  The provisions of this Loan
Agreement shall inure to the benefit of and be binding upon Borrower and Lender,
and their respective heirs, legal representatives, successors and assigns;
provided, however, that this Loan Agreement and the Loan Documents may not be
assigned by Borrower without the prior written consent of Lender, which consent
may be withheld or conditioned in Lender’s sole and absolute discretion.  No
delay on the part of Lender in exercising any right, power or privilege shall
operate as a waiver thereof.  The rights and remedies of Lender specified in
this Loan Agreement shall be in addition to and not exclusive of any other
rights and remedies which Lender, by operation of law, would otherwise possess.
 
9.2.              Appraisals; Decline Condition.
 
9.2.1           Right of Lender to Obtain Appraisal.  In addition to any other
right of Lender or any other appraisal requirement under the Loan Documents,
Lender shall have the right to obtain an appraisal of the Real Property at any
time during the term of the Loan: (a) if an Event of Default has occurred under
the Loan Documents; (b) if any material damage or destruction of the Real
Property or the Project has occurred; (c) if Lender determines, in its
commercially reasonable discretion, that the security for the Loan has been
physically or financially impaired in any material manner including, but not
limited to, as a result of any change in the use of the Real Property, change in
entitlements or anticipated entitlements (e.g., zoning or other land use
approvals) to the Real Property, change in easements or anticipated easements
benefitting or burdening the Real Property, or change in any major tenant or
major tenant lease; (d) if such appraisal is required by the then-current
banking laws or regulations. If Lender so elects to obtain an appraisal, Lender
shall select and engage an appraiser (the “Appraiser”) who is licensed or
certified to appraise real property in the State where the Real Property is
located, and who, in Lender’s sole judgment, has the appropriate experience and
level of competency to prepare an appraisal of the Real Property.  The cost of
such appraisal shall be borne by Borrower provided that Borrower shall not be
required to pay for any such appraisal more than once in any twelve (12) month
period.  The appraisal shall be in a form, content and substance acceptable to
Lender, in its sole discretion, and shall meet Lender’s minimum appraisal
standards and all regulatory requirements.  Borrower shall cooperate with Lender
and the Appraiser by providing any requested information, documents and access
to the Project.  If Borrower fails to cooperate with Lender or the Appraiser,
such event shall constitute an Event of Default hereunder and Lender shall be
entitled to exercise all remedies available to it hereunder.
 
9.2.2           Decline in Property Value.  In the event any such appraisal
obtained pursuant to Section 9.2.1 above shall determine that the then
outstanding principal balance of the Note, together with the undisbursed portion
of the Loan which Lender may be obligated to disburse to Borrower in accordance
with the Loan Documents, is greater than 80% of the market value of the Real
Property as determined by the Appraiser (the “Decline Condition”), Lender may
deliver written notice thereof to Borrower.  If Borrower fails to cure the
Decline Condition pursuant to Section 9.2.3 below, such Decline Condition shall
constitute an Event of Default and Lender shall be entitled to exercise all
remedies available to it hereunder.
 
9.2.3           Borrower’s Right to Cure - Repayment.  Upon Borrower’s receipt
of written notice of a Decline Condition, Borrower may, at its option, repay a
portion of the principal amount of the Note then outstanding such that the ratio
of: (a) the sum of the outstanding principal balance of the Note plus the amount
of the Loan proceeds that remain undisbursed to (b) the appraised value of the
Real Property (as determined by the Appraiser pursuant to this Section 9.2) is,
after completion of such repayment, less than 80%.  Such repayment shall be made
to Lender, in cash or other immediately available funds, within sixty (60) days
after Borrower receives written notice of the Decline Condition.  Upon
Borrower’s repayment in accordance with this Section, the Decline Condition
shall be deemed to be cured and no Event of Default shall occur (however, it
shall not prevent or constitute a waiver of the right of Lender to prosecute any
future Event of Default based on a future Decline Condition or otherwise).
 
 
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9.2.4           Borrower’s Right to Cure - Additional Collateral.  In the
alternative to Section 9.2.3 above, if permitted by Lender at the time of the
occurrence of the Decline Condition, upon Borrower’s receipt of written notice
of a Decline Condition, Borrower may, at its option, grant to Lender additional
collateral security (whether in the form of the granting of a mortgage or deed
of trust on additional real property owned by Borrower or otherwise) deemed
acceptable to Lender, in its sole discretion, such that the ratio of: (a) the
sum of the outstanding principal balance of the Note plus the amount of the Loan
proceeds that remain undisbursed to (b) the appraised value of the Real Property
(as determined by the Appraiser pursuant to this Section 9.2) plus the market
value of such additional collateral security (as determined by Lender in its
sole discretion) is, after the grant of such additional collateral security,
less than 80%.  Borrower acknowledges and agrees that Lender may permit or
decline any additional collateral security in its sole discretion, and may
impose requirements on the granting of such additional collateral security
(e.g., an appraisal, title insurance, environmental site assessment and other
due diligence items may be necessary prior to the granting of a mortgage or deed
of trust on additional real property).  Such grant shall be made to Lender, in a
form acceptable to Lender in its sole discretion, within sixty (60) days after
Borrower receives written notice of the Decline Condition (or, if Lender’s
requirements for the granting of such additional collateral security cannot be
completed within such sixty (60) day period, then within such period of time as
Lender may determine is appropriate).  Upon Borrower’s grant in accordance with
this Section, the Decline Condition shall be deemed to be cured and no Event of
Default shall occur (however, it shall not prevent or constitute a waiver of the
right of Lender to prosecute any future Event of Default based on a future
Decline Condition or otherwise).
 
9.3.              USA Patriot Act.   Lender hereby notifies Borrower that
pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56
(signed into law October 26, 2001)) (the “Patriot Act”), Lender is required to
obtain, verify and record information that identifies Borrower and its
affiliated entities, if any, which information includes the name and address of
Borrower and its affiliated entities, if any, and other information that will
allow Lender to identify Borrower and its affiliated entities in accordance with
the Patriot Act.  Borrower hereby agrees to provide such information promptly
upon request by Lender. In connection therewith, Borrower shall: (a) ensure that
no person who owns a controlling interest in or otherwise controls Borrower or
any affiliated entity is or shall be listed on the “Specially Designated
Nationals and Blocked Person List” or other similar lists maintained by the
Office of Foreign Assets Control (“OFAC”), the Department of the Treasury, or
included in any Executive Orders; (b) not use or permit the use of the proceeds
of the Loan to violate any of the foreign asset control regulations of OFAC or
any enabling statute or Executive Order relating thereto; and (c) comply, and
cause each affiliated entity to comply, with all applicable Bank Secrecy Act
laws and regulations, as amended.
 
 
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9.4.              Anti-Terrorism Laws.  In addition to all other representations
and warranties contained herein, Borrower hereby represents and warrants that:
 
9.4.1.           Borrower is not in violation of any laws relating to terrorism
or money laundering including, without limitation, Executive Order No. 13224 on
Terrorist Financing effective September 23, 2001, and the Currency and Foreign
Transactions Reporting Act of 1970, each as amended from time to time
(collectively, “ Anti-Terrorism Laws”).
 
9.4.2.           No action, proceeding, investigation, charge, claim, report or
notice has been filed, commenced or threatened against Borrower alleging any
violation of any Anti-Terrorism Law.
 
9.4.3.           Borrower has no knowledge or notice of any fact, event,
circumstance, situation, or condition which could reasonably be expected to
result in: (A) any action, proceeding, investigation, charge, claim, report, or
notice being filed, commenced, or threatened against it alleging any violation
of, or failure to comply with, any Anti-Terrorism Law; or (B) the imposition of
any civil or criminal penalty against Borrower for any failure to so
comply.  Borrower has provided Lender with sufficient information (including
names, addresses and, where applicable, jurisdiction of formation or
organization) to reasonably permit Lender to verify the foregoing
representation.
 
9.4.4.           Borrower does not: (A) conduct any business or engage in making
or receiving any contribution of funds, goods or services to or for the benefit
of any person who is in violation of any Anti-Terrorism Law; (B) deal in, or
otherwise engage in any transactions relating to any property or interests in
property blocked under any Anti-Terrorism Law; or (C) engage in or conspire to
engage in any transaction that evades or avoids, or has the purpose of evading
or avoiding, or attempts to violate, any prohibition set forth in any
Anti-Terrorism Law.
 
9.5.              Hedging Instruments.  The obligations and indebtedness under
the Loan shall include, without limitation, all obligations, indebtedness and
liabilities of Borrower to Lender arising pursuant to or in connection with any
swap, collar, cap, future, forward or derivative transaction, including any
involving, or settled by reference to, one or more interest rates, currencies,
commodities, equity or debt instruments, any economic, financial or pricing
index or basis, or any similar transaction, including any option with respect to
any of these transactions and any combination of these transactions.
 
9.6.              Survival of Representations and Warranties.   Borrower
understands and agrees that in extending Loan advances, Lender is relying on all
representations, warranties, and covenants made by Borrower in this Loan
Agreement or in any certificate or other instrument delivered by Borrower to
Lender under this Loan Agreement or the Loan Documents.  Borrower further agrees
that regardless of any investigation made by Lender, all such representations,
warranties and covenants will survive the extension of Loan advances and
delivery to Lender of the Loan Documents, shall be continuing in nature, shall
be deemed made and redated by Borrower at the time each Loan advance is
made,  and shall remain in full force and effect until such time as the Note
shall be paid in full, or until this Loan Agreement shall be terminated in the
manner provided above, whichever is the last to occur.
 
9.7.              Execution and Amendment.  This Loan Agreement may be executed
in counterparts, all of which shall be taken to be one and the same instrument,
for the same effect as if all parties hereto had executed the same signature
page.  This Loan Agreement may not be changed orally, but only by an agreement
in writing signed by the parties hereto
 
 
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9.8.              Signs.  [RESERVED].
 
9.9.              Notices.  All notices, requests and demands to or upon the
respective parties hereto to be effective shall be in writing and, unless
otherwise expressly provided herein, shall be deemed to have been duly given or
made when delivered by hand, or when deposited in the mail, postage prepaid, or
with Federal Express or a similar nationally known overnight delivery service,
addressed as follows or to such address or other address as may be hereafter
notified by the respective parties hereto:
 

 
Lender: 
BMO Harris Bank N.A.
50 South Sixth Street, Suite 1000
Minneapolis, MN 55402
Attention:  Commercial Lending
Telecopy No.  (612) 904-8011

 

 
Borrower: 
WSI Industries, Inc.
213 Chelsea Road
Monticello, MN 55362
Attention:  Vice/President/Chief Financial Officer
Telecopy No.  763-295-9212

 
Guarantor: 
WSI Rochester, Inc.
213 Chelsea Road
Monticello, MN 55362
Attention:  Vice/President/Chief Financial Officer
Telecopy No.  763-295-9212

 
Guarantor: 
WSI Industries, Co
213 Chelsea Road
Monticello, MN 55362
Attention:  Vice/President/Chief Financial Officer
Telecopy No.  763-295-9212

 
9.10.              Severability.  Any provision of this Loan Agreement which is
prohibited or unenforceable shall be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions
hereof.
 
9.11.              Estoppel Certificate.  Borrower, within fifteen (15) days
after written notice from Lender, will furnish Lender with an estoppel
certificate as to the amount of Loan proceeds advanced pursuant to this Loan
Agreement, stating that no offsets or defenses exist hereunder and stating such
other matters as reasonably requested by Lender.
 
9.12.              Headings.  Section and subsection headings in this Loan
Agreement are included herein for convenience only and shall not constitute a
part of this Loan Agreement for any purpose.
 
 
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9.13.              Maintenance of Security Interest.  Upon request, Borrower
shall take any actions reasonably deemed advisable by Lender to preserve the
collateral described in the Collateral Security Documents and/or to establish,
determine the priority of, perfect, continue perfection, terminate and enforce
Lender’s rights pursuant to the Collateral Security Documents.  In furtherance
thereof, if Borrower shall fail or refuse to take such action within a
reasonable period of time as determined by the then existing circumstances (but
in no event less than ten (10) days), Borrower hereby appoints Lender as its
true and lawful attorney-in-fact to execute and deliver all documents necessary
to preserve the collateral described in the Collateral Security Documents and/or
to establish, determine the priority of, perfect, continue perfection, terminate
and/or enforce Lender’s interest pursuant to the Collateral Security Documents.
 
9.14.              No Right of Reliance.  Lender may waive, refrain from
enforcing or grant indulgences with respect to any covenant, condition or term
hereof without the consent of any other person and no other person shall be
entitled to require or rely upon the strict enforcement of Lender's right
thereunder.  Specifically, Lender shall have no responsibility whatsoever for
the timely or workmanlike construction of the Project or any of the improvements
within the Project or the protection of the Real Property.
 
9.15.              Time of the Essence.  The time provided for Borrower’s and
each Guarantor’s performance of their respective covenants and agreements
hereunder are of the essence of this Loan Agreement.
 
9.16.              No Representations by Lender.  Lender has no obligation in
connection with the Project except to advance the proceeds of the Loan as herein
provided, and Lender shall not be liable for the performance of any contractor,
subcontractor, or supplier of materials, fixtures, equipment and any other
personal property or for the quality of workmanship or the quality of such
materials, fixtures, equipment and other personal property or for the failure to
construct, complete, protect or insure the improvements, or for the payment of
any costs or expenses incurred in connection therewith, or for the performance
or nonperformance or delay in performance of any obligation of Borrower to
Lender.  Any inspection by Lender or Lender's consultant of the Project,
approval of the Plans and Specifications or other activities in the nature
thereof shall only be for the sole benefit of Lender and for the purpose of
protecting the security of Lender, and the same shall in no way be construed as
a representation on the part of Lender that there is compliance on the part of
Borrower with the Plans and Specifications or that the construction of the
improvements is free from faulty material, or defective workmanship.  The fact
that Lender or Lender's consultant makes such inspections shall not relieve
Borrower from its duty to independently ascertain that the Project is being
completed in accordance with the Plans and Specifications, and Borrower has no
right to rely on any procedures required by Lender.
 
9.17.              Immunity.  Lender’s commitment to make advances hereunder
shall not at any time be subject or liable to attachment or levy at the suit of
any creditor of Borrower or any agent, contractor, subcontractor or supplier of
Borrower.  All rights of the construction contractors, subcontractors, laborers
and suppliers of materials, fixtures, equipment and other personal property
shall be and are subordinate and inferior to Lender's interest and lien under
the terms of the Loan Documents and this Loan Agreement.
 
9.18.              VENUE.  BORROWER HEREBY AGREES THAT ALL ACTIONS OR
PROCEEDINGS INITIATED BY BORROWER AND ARISING DIRECTLY OR INDIRECTLY OUT OF THIS
LOAN AGREEMENT OR THE LOAN DOCUMENTS SHALL BE LITIGATED IN THE DISTRICT COURT OF
WRIGHT COUNTY, MINNESOTA, OR AT LENDER’S DISCRETION IN THE UNITED STATES
DISTRICT COURT FOR THE DISTRICT OF MINNESOTA. BORROWER HEREBY EXPRESSLY SUBMITS
AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR PROCEEDING
COMMENCED BY LENDER IN SUCH COURT.  BORROWER WAIVES ANY CLAIM THAT WRIGHT
COUNTY, MINNESOTA, OR THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF
MINNESOTA IS AN INCONVENIENT FORUM OR AN IMPROPER FORUM BASED ON LACK OF
VENUE.  THE EXCLUSIVE CHOICE OF FORUM FOR BORROWER SET FORTH IN THIS SECTION
SHALL NOT BE DEEMED TO PRECLUDE THE ENFORCEMENT, BY LENDER, OF ANY JUDGMENT
OBTAINED IN ANY OTHER FORUM OR THE TAKING, BY LENDER, OF ANY ACTION TO ENFORCE
THE SAME IN ANY OTHER APPROPRIATE JURISDICTION, AND BORROWER HEREBY WAIVES THE
RIGHT, IF ANY, TO COLLATERALLY ATTACK ANY SUCH JUDGMENT OR ACTION.
 
 
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9.19.              WAIVER OF TRIAL BY JURY.  LENDER AND BORROWER HEREBY WAIVE
THE RIGHT TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT
BY EITHER LENDER OR BORROWER AGAINST THE OTHER.
 
9.20.              Governing Law.  This Loan Agreement will be governed by
federal law applicable to Lender and, to the extent not preempted by federal
law, the laws of the State of Minnesota without regard to its conflicts of law
provisions.
 
9.21.              Governmental Regulation of Lender.  Lender is subject to
various governmental authorities and the laws, rules and regulations enacted,
adopted and promulgated by them.  To the extent that Lender's power and
authority to perform the obligations on the part of Lender to be performed under
this Loan Agreement, now or hereafter, may be limited or regulated thereby,
Lender is hereby excused from such performance if such limitation or regulation
prevents Lender's performance or if such limitation or regulation limits
Lender's performance, Lender's obligations hereunder shall be modified to be
consistent with such limitation or regulation.
 
9.22.              Final Agreement.  This Loan Agreement and the Loan Documents
represent the final agreement between Lender and Borrower with respect to the
transactions contemplated hereby.  Without limiting the generality of the
foregoing, the terms and provisions of this Loan Agreement, together with the
Loan Documents, supersede any inconsistent term or condition of any loan
commitment letter or term sheet provided to Borrower and any previous
discussions, negotiations, correspondence and oral statements of any party
hereto and their respective employees, agents or representatives; provided,
however, that all obligations of Borrower under any such loan commitment letter
or term sheet to pay any fees to Lender or to pay any costs and expenses
relating to the Loan or the loan commitment shall survive the execution and
delivery of this Loan Agreement and the Loan Documents.  Any failure of Borrower
to perform any such obligation shall constitute an Event of Default under the
Loan Documents.
 
9.23.              No Usury.  In no event shall interest, including any charge
or fee deemed to be interest, accrue or be payable hereon or on account of the
indebtedness arising hereunder, under the Note or under any Loan Document in
excess of the highest rate allowed by law for the time such indebtedness shall
be outstanding and unpaid.  If by reason of the acceleration of maturity of such
indebtedness, or for any other reason, interest in excess of the highest rate
allowed by law shall be charged or paid, any such excess shall be refunded to
Borrower or other payoff together with interest thereon at the highest rate
permitted by law at the time of such overcharge.  Borrower agrees to accept such
reimbursement or principal reduction in lieu of any other remedies it may have
under applicable law.
 
9.24.              Further Assurances.  Borrower shall, from time to time,
execute and deliver to Lender such additional documents and shall provide such
additional information as Lender may reasonably request to carry out the terms
of this Loan Agreement.
 
 
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IN WITNESS WHEREOF, the undersigned have executed this Loan Agreement on the
day, month and year first above written.
 
LENDER:
 
BMO HARRIS BANK N.A.

By:                                                                                              
Name:                                                                                         
Title:                                                                                              
 
 
BORROWER:
 
WSI INDUSTRIES, INC., a Minnesota corporation

By:                                                                                              
Name:   Paul D. Sheely
Title:     Vice President/Chief Financial Officer

GUARANTORS:

WSI ROCHESTER, INC., a Minnesota
corporation

By:                                                                                              
Name:   Paul D. Sheely
Title:     Vice President/Chief Financial Officer

WSI INDUSTRIES CO., a Minnesota corporation

By:                                                                                               
Name:       
                                                                                  
Name:   Paul D. Sheely
Title:     Vice President/Chief Financial Officer
 
 
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EXHIBIT A

Legal Description
 
Lot 1, Block 1, Remmele Addition, Wright County, Minnesota
 

 
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