Exhibit 10.1

 

 

CREDIT AGREEMENT

 

THIS CREDIT AGREEMENT (this "Agreement") is entered into as of June 30, 2016, by
and between FLEXSTEEL INDUSTRIES, INC., a Minnesota corporation ("Borrower"),
and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank").

 

RECITALS

 

Borrower has requested that Bank extend or continue credit to Borrower as
described below, and Bank has agreed to provide such credit to Borrower on the
terms and conditions contained herein.

 

NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, Bank and Borrower hereby agree as follows:

 

ARTICLE I

CREDIT TERMS

 

SECTION 1.1.        LINE OF CREDIT.

 

(a)        Line of Credit. Subject to the terms and conditions of this
Agreement, Bank hereby agrees to make advances to Borrower from time to time up
to and including June 30, 2017, not to exceed at any time the aggregate
principal amount of Ten Million Dollars ($10,000,000.00) ("Line of Credit"), the
proceeds of which shall be used to finance Borrower’s working capital
requirements. Borrower's obligation to repay advances under the Line of Credit
shall be evidenced by a promissory note dated as of June 30, 2016, as modified
from time to time ("Line of Credit Note"), all terms of which are incorporated
herein by this reference.

 

(b)        Borrowing and Repayment. Borrower may from time to time during the
term of the Line of Credit borrow, partially or wholly repay its outstanding
borrowings, and reborrow, subject to all of the limitations, terms and
conditions contained herein or in the Line of Credit Note; provided however,
that the total outstanding borrowings under the Line of Credit shall not at any
time exceed the maximum principal amount available thereunder, as set forth
herein.

 

(c)        Letter of Credit Subfeature. As a subfeature under the Line of
Credit, Bank agrees from time to time during the term thereof to issue or cause
an affiliate to issue standby letters of credit for the account of Borrower
(each, a “Letter of Credit” and collectively, “Letters of Credit”); provided
however, that the aggregate undrawn amount of all outstanding Letters of Credit
shall not at any time exceed Four Million Dollars ($4,000,000.00). The form and
substance of each Letter of Credit shall be subject to approval by Bank, in its
sole discretion. No Letter of Credit shall have an expiration date more than
three hundred sixty-five (365) days beyond the maturity date of the Line of
Credit. The undrawn amount of all Letters of Credit shall be reserved under the
Line of Credit and shall not be available for borrowings thereunder. Each Letter
of Credit shall be subject to the additional terms and conditions of the Letter
of Credit agreements, applications and any related documents required by Bank in
connection with the issuance thereof. Each drawing paid under a Letter of Credit
shall be deemed an advance under the Line of Credit and shall be repaid by
Borrower in accordance with the terms and conditions of this Agreement
applicable to such advances; provided however, that if advances under the Line
of Credit are not available, for any reason, at the time any drawing is paid,
then Borrower shall immediately pay to Bank the full amount drawn, together with
interest thereon from the date such drawing is paid to the date such amount is
fully repaid by Borrower, at the rate of interest

 

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applicable to advances under the Line of Credit. In such event Borrower agrees
that Bank, in its sole discretion, may debit any account maintained by Borrower
with Bank for the amount of any such drawing.

 

SECTION 1.2.        INTEREST/FEES.

 

(a)        Interest. The outstanding principal balance of each credit subject
hereto shall bear interest at the rate of interest set forth in each promissory
note or other instrument or document executed in connection therewith.

 

(b)        Computation and Payment. Interest shall be computed on the basis set
forth in each promissory note or other instrument or document required hereby.
Interest shall be payable at the times and place set forth in each promissory
note or other instrument or document required hereby.

 

(c)        Unused Commitment Fee. Borrower shall pay to Bank a fee equal to one
hundredth eighty-five thousandths percent (0.185%) per annum (computed on the
basis of a 360-day year, actual days elapsed) on the daily unused amount of the
Line of Credit, which fee shall be calculated on a quarterly basis by Bank and
shall be due and payable by Borrower in arrears on the last day of each quarter,
commencing on September 30, 2016.

 

(d)        Letter of Credit Fees. Borrower shall pay to Bank (i) fees upon the
issuance of each Letter of Credit equal to one percent (1.00%) per annum
(computed on the basis of a 360-day year, actual days elapsed) of the face
amount thereof, and (ii) fees upon the payment or negotiation of each drawing
under any Letter of Credit and fees upon the occurrence of any other activity
with respect to any Letter of Credit (including without limitation, the
transfer, amendment or cancellation of any Letter of Credit) determined in
accordance with Bank's standard fees and charges then in effect for such
activity.

 

SECTION 1.3.        GUARANTIES. The payment and performance of all indebtedness
and other obligations of Borrower to Bank shall be guaranteed jointly and
severally by DMI FURNITURE, INC., as evidenced by and subject to the terms of
guaranties in form and substance satisfactory to Bank.

 

ARTICLE II

REPRESENTATIONS AND WARRANTIES

 

Borrower makes the following representations and warranties to Bank, which
representations and warranties shall survive the execution of this Agreement and
shall continue in full force and effect until the full and final payment, and
satisfaction and discharge, of all obligations of Borrower to Bank subject to
this Agreement.

 

SECTION 2.1.        LEGAL STATUS. Borrower is: (a) a corporation, duly organized
and existing and in good standing under the laws of Minnesota, and is qualified
or licensed to do business (and is in good standing as a foreign corporation, if
applicable) in all jurisdictions in which such qualification or licensing is
required or in which the failure to so qualify or to be so licensed could have a
material adverse effect on Borrower; and (b) not the target of any trade or
economic sanctions promulgated by the United Nations or the governments of the
United States, the United Kingdom, the European Union, or any other jurisdiction
in which the Borrower is located or operates (collectively, “Sanctions”).

 

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SECTION 2.2.        AUTHORIZATION AND VALIDITY. This Agreement and each
promissory note, contract, instrument and other document required hereby or at
any time hereafter delivered to Bank in connection herewith (collectively, the
"Loan Documents") have been duly authorized, and upon their execution and
delivery in accordance with the provisions hereof will constitute legal, valid
and binding agreements and obligations of Borrower or the party which executes
the same, enforceable in accordance with their respective terms.

 

SECTION 2.3.        NO VIOLATION. The execution, delivery and performance by
Borrower of each of the Loan Documents do not violate any provision of any law
or regulation, or contravene any provision of the organizational and governing
documents of Borrower, or result in any breach of or default under any contract,
obligation, indenture or other instrument to which Borrower is a party or by
which Borrower may be bound.

 

SECTION 2.4.        LITIGATION. There are no pending, or to the best of
Borrower's knowledge threatened, actions, claims, investigations, suits or
proceedings by or before any governmental authority, arbitrator, court or
administrative agency which could have a material adverse effect on the
financial condition or operation of Borrower other than those disclosed by
Borrower to Bank in writing prior to the date hereof.

 

SECTION 2.5.        CORRECTNESS OF FINANCIAL STATEMENT. The annual financial
statement of Borrower dated June 30, 2015, and all interim financial statements
delivered to Bank since said date, true copies of which have been delivered by
Borrower to Bank prior to the date hereof, (a) are complete and correct and
present fairly the financial condition of Borrower, (b) disclose all liabilities
of Borrower that are required to be reflected or reserved against under
generally accepted accounting principles, whether liquidated or unliquidated,
fixed or contingent, and (c) have been prepared in accordance with generally
accepted accounting principles consistently applied. Since the dates of such
financial statements there has been no material adverse change in the financial
condition of Borrower, nor has Borrower mortgaged, pledged, granted a security
interest in or otherwise encumbered any of its assets or properties except in
favor of Bank or as otherwise permitted by Bank in writing.

 

SECTION 2.6.        INCOME TAX RETURNS. Borrower has no knowledge of any pending
assessments or adjustments of its income tax payable with respect to any year in
excess of $500,000.00.

 

SECTION 2.7.        NO SUBORDINATION. There is no agreement, indenture, contract
or instrument to which Borrower is a party or by which Borrower may be bound
that requires the subordination in right of payment of any of Borrower's
obligations subject to this Agreement to any other obligation of Borrower.

 

SECTION 2.8.        PERMITS, FRANCHISES. Borrower possesses, and will hereafter
possess, all permits, consents, approvals, franchises and licenses required and
rights to all trademarks, trade names, patents, and fictitious names, if any,
necessary to enable it to conduct the business in which it is now engaged in
compliance with applicable law.

 

SECTION 2.9.        ERISA. Borrower is in compliance in all material respects
with all applicable provisions of the Employee Retirement Income Security Act of
1974, as amended or recodified from time to time ("ERISA"); Borrower has not
violated any provision of any defined employee pension benefit plan (as defined
in ERISA) maintained or contributed to by Borrower (each, a "Plan"); no
Reportable Event as defined in ERISA has occurred and is continuing with respect
to any Plan initiated by Borrower; Borrower has met its minimum funding
requirements

 

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under ERISA with respect to each Plan; and each Plan will be able to fulfill its
benefit obligations as they come due in accordance with the Plan documents and
under generally accepted accounting principles.

 

SECTION 2.10.        OTHER OBLIGATIONS. Borrower is not in default on any
obligation for borrowed money, any purchase money obligation or any other
material lease, commitment, contract, instrument or obligation.

 

SECTION 2.11.        ENVIRONMENTAL MATTERS. Except as disclosed by Borrower to
Bank in writing prior to the date hereof, Borrower is in compliance in all
material respects with all applicable federal or state environmental, hazardous
waste, health and safety statutes, and any rules or regulations adopted pursuant
thereto, which govern or affect any of Borrower's operations and/or properties,
including without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, the Superfund Amendments and
Reauthorization Act of 1986, the Federal Resource Conservation and Recovery Act
of 1976, and the Federal Toxic Substances Control Act, as any of the same may be
amended, modified or supplemented from time to time. None of the operations of
Borrower is the subject of any federal or state investigation evaluating whether
any remedial action involving a material expenditure is needed to respond to a
release of any toxic or hazardous waste or substance into the environment.
Borrower has no material contingent liability in connection with any release of
any toxic or hazardous waste or substance into the environment.

 

ARTICLE III

CONDITIONS

 

SECTION 3.1.        CONDITIONS OF INITIAL EXTENSION OF CREDIT. The obligation of
Bank to extend any credit contemplated by this Agreement is subject to the
fulfillment to Bank's satisfaction of all of the following conditions:

 

(a)        Approval of Bank Counsel. All legal matters incidental to the
extension of credit by Bank shall be satisfactory to Bank's counsel.

 

(b)        Documentation. Bank shall have received, in form and substance
satisfactory to Bank, each of the following, duly executed:

 

(i)This Agreement and each promissory note or other instrument or document
required hereby.

(ii)Certificate of Incumbency (2).

(iii)Corporate Resolution: Borrowing.

(iv)Corporate Resolution: Continuing Guaranty.

(v)Continuing Guaranty.

(vi)Such other documents as Bank may require under any other Section of this
Agreement.

 

(c)        Financial Condition. There shall have been no material adverse
change, as determined by Bank, in the financial condition or business of
Borrower or any Third Party Obligor hereunder, if any, nor any material decline,
as determined by Bank, in the market value of any collateral required hereunder
or a substantial or material portion of the assets of Borrower or any such Third
Party Obligor, if any.

 

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SECTION 3.2.        CONDITIONS OF EACH EXTENSION OF CREDIT. The obligation of
Bank to make each extension of credit requested by Borrower hereunder shall be
subject to the fulfillment to Bank's satisfaction of each of the following
conditions:

 

(a)        Compliance. The representations and warranties contained herein and
in each of the other Loan Documents shall be true on and as of the date of the
signing of this Agreement and on the date of each extension of credit by Bank
pursuant hereto, with the same effect as though such representations and
warranties had been made on and as of each such date, and on each such date, no
Event of Default as defined herein, and no condition, event or act which with
the giving of notice or the passage of time or both would constitute such an
Event of Default, shall have occurred and be continuing or shall exist.

 

(b)        Documentation. Bank shall have received all additional documents
which may be required in connection with such extension of credit.

 

(c)        Letter of Credit Documentation. Prior to the issuance of any Letter
of Credit, Bank shall have received a Letter of Credit Agreement and any other
letter of credit documentation required by Bank, in each case completed and duly
executed by Borrower.

 

ARTICLE IV

AFFIRMATIVE COVENANTS

 

Borrower covenants that so long as Bank remains committed to extend credit to
Borrower pursuant hereto, or any liabilities (whether direct or contingent,
liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents
remain outstanding, and until payment in full of all obligations of Borrower
subject hereto, Borrower shall, unless Bank otherwise consents in writing:

 

SECTION 4.1.        PUNCTUAL PAYMENTS. Punctually pay all principal, interest,
fees or other liabilities due under any of the Loan Documents at the times and
place and in the manner specified therein, and immediately upon demand by Bank,
the amount by which the outstanding principal balance of any credit subject
hereto at any time exceeds any limitation on borrowings applicable thereto.

 

SECTION 4.2.        ACCOUNTING RECORDS. Maintain adequate books and records in
accordance with generally accepted accounting principles consistently applied,
and permit any representative of Bank, at any reasonable time, to inspect, audit
and examine such books and records, to make copies of the same, and to inspect
the properties of Borrower.

 

SECTION 4.3.        FINANCIAL STATEMENTS. Provide to Bank all of the following,
in form and detail satisfactory to Bank:

 

(a)        not later than 120 days after and as of the end of each fiscal year,
an audited financial statement of Borrower prepared by a certified public
accountant acceptable to Bank, to include a balance sheet, income statement and
statement of cash flows; and

 

(b)        not later than 60 days after and as of the end of each fiscal
quarter, a financial statement of Borrower, prepared by Borrower, to include
balance sheet, income statement and statement of cash flows; and

 

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(c)        contemporaneously with each annual and quarterly financial statement
of Borrower required hereby, a certificate of the president or chief financial
officer of Borrower, as applicable, that said financial statements are accurate,
that Borrower is in compliance with all financial covenants in this Agreement
(as evidenced by detailed calculations attached to such certificate), and that
there exists no Event of Default nor any condition, act or event which with the
giving of notice or the passage of time or both would constitute an Event of
Default; and

 

(d)        from time to time such other information as Bank may reasonably
request, including without limitation, copies of rent rolls and other
information with respect to any real property collateral required hereby.

 

SECTION 4.4.        COMPLIANCE. Preserve and maintain all licenses, permits,
governmental approvals, rights, privileges and franchises necessary for the
conduct of its business; comply with the provisions of all documents pursuant to
which Borrower is organized and/or which govern Borrower's continued existence;
comply with the requirements of all laws, rules, regulations and orders of any
jurisdiction in which the Borrower is located or doing business, or otherwise is
applicable to Borrower, including, without limitation, (a) all Sanctions, (b)
all laws and regulations that relate to money laundering, any predicate crime to
money laundering, or any financial record keeping and reporting requirements
related thereto, (c) the U.S. Foreign Corrupt Practices Act of 1977, as amended,
(d) the U.K. Bribery Act of 2010, as amended, and (e) any other applicable
anti-bribery or anti-corruption laws and regulations.

 

SECTION 4.5.        INSURANCE. Maintain and keep in force, for each business in
which Borrower is engaged, insurance of the types and in amounts customarily
carried in similar lines of business, including but not limited to fire,
extended coverage, public liability, flood, and, if required, hurricane,
windstorm, seismic property damage and workers' compensation, with all such
insurance carried in amounts satisfactory to Bank, and deliver to Bank from time
to time at Bank's request schedules setting forth all insurance then in effect.
Such insurance may be obtained from an insurer or through an insurance agent of
Borrower’s choice, provided that any insurer chosen by Borrower is acceptable to
Bank on such reasonable grounds as may be permitted under applicable law.

 

SECTION 4.6.        FACILITIES. Keep all properties useful or necessary to
Borrower's business in good repair and condition, and from time to time make
necessary repairs, renewals and replacements thereto so that such properties
shall be fully and efficiently preserved and maintained.

 

SECTION 4.7.        TAXES AND OTHER LIABILITIES. Pay and discharge when due any
and all indebtedness, obligations, assessments and taxes, both real or personal,
including without limitation federal and state income taxes and state and local
property taxes and assessments, except (a) such as Borrower may in good faith
contest or as to which a bona fide dispute may arise, and (b) for which Borrower
has made provision, to Bank's satisfaction, for eventual payment thereof in the
event Borrower is obligated to make such payment.

 

SECTION 4.8.        LITIGATION. Promptly give notice in writing to Bank of any
litigation pending or threatened against Borrower with claims in excess of an
aggregate of $500,000.00 for all pending or threatened litigation.

 

SECTION 4.9.        FINANCIAL CONDITION. Maintain Borrower's financial condition
as follows using generally accepted accounting principles consistently applied
and used consistently with prior practices (except to the extent modified by the
definitions herein):

 

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(a)        Working Capital not less than $60,000,000.00 at each fiscal quarter
end, with “Working Capital” defined as total current assets minus total current
liabilities.

 

(b)        Interest Coverage Ratio not less than 3.0 to 1.0 as of each fiscal
quarter end, determined on a rolling 4-quarter basis, with “Interest Coverage
Ratio” defined as net profit after taxes plus interest expense (net of
capitalized interest expense) and stock based compensation less
dividends/distributions, divided by interest expense.

 

SECTION 4.10.        NOTICE TO BANK. Promptly (but in no event more than five
(5) days after the occurrence of each such event or matter) give written notice
to Bank in reasonable detail of: (a) the occurrence of any Event of Default, or
any condition, event or act which with the giving of notice or the passage of
time or both would constitute an Event of Default; (b) any change in the name or
the organizational structure of Borrower; (c) the occurrence and nature of any
Reportable Event or Prohibited Transaction, each as defined in ERISA, or any
funding deficiency with respect to any Plan; or (d) any termination or
cancellation of any insurance policy which Borrower is required to maintain, or
any uninsured or partially uninsured loss through liability or property damage,
or through fire, theft or any other cause affecting Borrower's property.

 

ARTICLE V

NEGATIVE COVENANTS

 

Borrower further covenants that so long as Bank remains committed to extend
credit to Borrower pursuant hereto, or any liabilities (whether direct or
contingent, liquidated or unliquidated) of Borrower to Bank under any of the
Loan Documents remain outstanding, and until payment in full of all obligations
of Borrower subject hereto, Borrower will not without Bank's prior written
consent:

 

SECTION 5.1.        USE OF FUNDS. Use any of the proceeds of any credit extended
hereunder except for the purposes stated in Article I hereof, or directly or
indirectly use any such proceeds for the purpose of (a) providing financing or
otherwise funding any targets of Sanctions; or (b) providing financing or
otherwise funding any transaction which would be prohibited by Sanctions or
would otherwise cause Bank or any of Bank’s affiliates to be in breach of any
Sanction.

 

SECTION 5.2.        CAPITAL EXPENDITURES. Make any additional investment in
fixed assets in any fiscal year in excess of an aggregate of $40,000,000.00.

 

SECTION 5.3.        OTHER INDEBTEDNESS. Create, incur, assume or permit to exist
any indebtedness or liabilities resulting from borrowings, loans or advances,
whether secured or unsecured, matured or unmatured, liquidated or unliquidated,
joint or several, except (a) the liabilities of Borrower to Bank, and (b) any
other liabilities of Borrower existing as of, and disclosed to Bank prior to,
the date hereof and (c) any obligations to American Trust and Savings Bank not
to exceed $10,000,000.00.

 

SECTION 5.4.        MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Merge into or
consolidate with any other entity; make any substantial change in the nature of
Borrower's business as conducted as of the date hereof; acquire all or
substantially all of the assets of any other entity; nor sell, lease, transfer
or otherwise dispose of all or a substantial or material portion of Borrower's
assets (a) except in the ordinary course of its business, (b) except

 

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acquisitions that in the aggregate do not exceed $25,000,000.00 each fiscal
year, and (c) except for the sale of assets that do not in the aggregate exceed
$5,000,000.00 each fiscal year.

 

SECTION 5.5.        GUARANTIES. Guarantee or become liable in any way as surety,
endorser (other than as endorser of negotiable instruments for deposit or
collection in the ordinary course of business), accommodation endorser or
otherwise for, nor pledge or hypothecate any assets of Borrower as security for,
any liabilities or obligations of any other person or entity, except any of the
foregoing in favor of Bank, and except additional guaranties in amounts not to
exceed an aggregate of $1,000,000.00 outstanding at any time.

 

SECTION 5.6.        LOANS, ADVANCES, INVESTMENTS. Make any loans or advances to
or investments in any person or entity, except any of the foregoing existing as
of, and disclosed to Bank prior to, the date hereof, and additional investments
in amounts not to exceed an aggregate of $100,000.00 at any time outstanding.

 

SECTION 5.7.        PLEDGE OF ASSETS. Mortgage, pledge, grant or permit to exist
a security interest in, or lien upon, all or any portion of Borrower's assets
now owned or hereafter acquired, except any of the foregoing in favor of Bank or
which is existing as of, and disclosed to Bank in writing prior to, the date
hereof and except purchase money liens to the extent they secure purchase money
debt permitted under this Agreement.

 

ARTICLE VI

EVENTS OF DEFAULT

 

SECTION 6.1.        The occurrence of any of the following shall constitute an
"Event of Default" under this Agreement:

 

(a)        Borrower shall fail to pay when due any principal, interest, fees or
other amounts payable under any of the Loan Documents.

 

(b)        Any financial statement or certificate furnished to Bank in
connection with, or any representation or warranty made by Borrower or any other
party under this Agreement or any other Loan Document shall prove to be
incorrect, false or misleading in any material respect when furnished or made.

 

(c)        Any default in the performance of or compliance with any obligation,
agreement or other provision contained herein or in any other Loan Document
(other than those specifically described as an “Event of Default” in this
section 6.1), and with respect to any such default that by its nature can be
cured, such default shall continue for a period of twenty (20) days from its
occurrence.

 

(d)        Any default in the payment or performance of any obligation, or any
defined event of default, under the terms of any contract, instrument or
document (other than any of the Loan Documents) pursuant to which Borrower, any
guarantor hereunder or any general partner or joint venturer in Borrower if a
partnership or joint venture (with each such guarantor, general partner and/or
joint venturer referred to herein as a "Third Party Obligor") has incurred any
debt or other liability to any person or entity, including Bank.

 

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(e)        Borrower or any Third Party Obligor shall become insolvent, or shall
suffer or consent to or apply for the appointment of a receiver, trustee,
custodian or liquidator of itself or any of its property, or shall generally
fail to pay its debts as they become due, or shall make a general assignment for
the benefit of creditors; Borrower or any Third Party Obligor shall file a
voluntary petition in bankruptcy, or seeking reorganization, in order to effect
a plan or other arrangement with creditors or any other relief under the
Bankruptcy Reform Act, Title 11 of the United States Code, as amended or
recodified from time to time ("Bankruptcy Code"), or under any state or federal
law granting relief to debtors, whether now or hereafter in effect; or Borrower
or any Third Party Obligor shall file an answer admitting the jurisdiction of
the court and the material allegations of any involuntary petition; or Borrower
or any Third Party Obligor shall be adjudicated a bankrupt, or an order for
relief shall be entered against Borrower or any Third Party Obligor by any court
of competent jurisdiction under the Bankruptcy Code or any other applicable
state or federal law relating to bankruptcy, reorganization or other relief for
debtors.

 

(f)        The filing of a notice of judgment lien against Borrower or any Third
Party Obligor; or the recording of any abstract or transcript of judgment
against Borrower or any Third Party Obligor in any county or recording district
in which Borrower or such Third Party Obligor has an interest in real property;
or the service of a notice of levy and/or of a writ of attachment or execution,
or other like process, against the assets of Borrower or any Third Party
Obligor; or the entry of a judgment against Borrower or any Third Party Obligor;
or any involuntary petition or proceeding pursuant to the Bankruptcy Code or any
other applicable state or federal law relating to bankruptcy, reorganization or
other relief for debtors is filed or commenced against Borrower or any Third
Party Obligor.

 

(g)        There shall exist or occur any event or condition that Bank in good
faith believes impairs, or is substantially likely to impair, the prospect of
payment or performance by Borrower, any Third Party Obligor, or the general
partner of either if such entity is a partnership, of its obligations under any
of the Loan Documents.

 

(h)        The death or incapacity of Borrower or any Third Party Obligor if an
individual. The withdrawal, resignation or expulsion of any one or more of the
general partners in Borrower or any Third Party Obligor if a partnership. The
dissolution or liquidation of Borrower or any Third Party Obligor if a
corporation, partnership, joint venture or other type of entity; or Borrower or
any such Third Party Obligor, or any of its directors, stockholders or members,
shall take action seeking to effect the dissolution or liquidation of Borrower
or such Third Party Obligor.

 

(i)        The withdrawal, resignation or expulsion of any one or more of the
general partners in Borrower or any change in control of Borrower or any entity
or combination of entities that directly or indirectly control Borrower, with
“control” defined as ownership of an aggregate of twenty-five percent (25%) or
more of the common stock, members' equity or other ownership interest (other
than a limited partnership interest).

 

(j)        The sale, transfer, hypothecation, assignment or encumbrance, whether
voluntary, involuntary or by operation of law, without Bank's prior written
consent, of all or any part of or interest in any real property collateral
required hereby.

 

SECTION 6.2.        REMEDIES. Upon the occurrence of any Event of Default:
(a) all principal, unpaid interest outstanding and other indebtedness of
Borrower under each of the Loan Documents, any term thereof to the contrary
notwithstanding, shall at Bank's option and without notice (except as expressly
provided in any mortgage or deed of trust pursuant to which Borrower has
provided Bank a lien on any real property collateral) become immediately due and
payable without presentment, demand, protest or any notices of any kind,
including without

 

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limitation, notice of nonperformance, notice of protest, notice of dishonor,
notice of intention to accelerate or notice of acceleration, all of which are
hereby expressly waived by Borrower; (b) the obligation, if any, of Bank to
extend any further credit under any of the Loan Documents shall immediately
cease and terminate; and (c) Bank shall have all rights, powers and remedies
available under each of the Loan Documents, or accorded by law, including
without limitation the right to resort to any or all security for any credit
subject hereto and to exercise any or all of the rights of a beneficiary or
secured party pursuant to applicable law. All rights, powers and remedies of
Bank may be exercised at any time by Bank and from time to time after the
occurrence of an Event of Default, are cumulative and not exclusive, and shall
be in addition to any other rights, powers or remedies provided by law or
equity.

 

ARTICLE VII

MISCELLANEOUS

 

SECTION 7.1.         NO WAIVER. No delay, failure or discontinuance of Bank in
exercising any right, power or remedy under any of the Loan Documents shall
affect or operate as a waiver of such right, power or remedy; nor shall any
single or partial exercise of any such right, power or remedy preclude, waive or
otherwise affect any other or further exercise thereof or the exercise of any
other right, power or remedy. Any waiver, permit, consent or approval of any
kind by Bank of any breach of or default under any of the Loan Documents must be
in writing and shall be effective only to the extent set forth in such writing.

 

SECTION 7.2.        NOTICES. All notices, requests and demands which any party
is required or may desire to give to any other party under any provision of this
Agreement must be in writing delivered to each party at the following address:

 

BORROWER: FLEXSTEEL INDUSTRIES, INC.
Attn: Tim Hall
385 Bell Street
Dubuque, Iowa 52001

 

BANK: WELLS FARGO BANK, NATIONAL ASSOCIATION
MAC N8200-026
666 Walnut Street
2nd Floor
Des Moines, Iowa 50309

 

or to such other address as any party may designate by written notice to all
other parties. Each such notice, request and demand shall be deemed given or
made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by
mail, upon the earlier of the date of receipt or three (3) days after deposit in
the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy,
upon receipt.

 

SECTION 7.3.        COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to
Bank immediately upon demand the full amount of all payments, advances, charges,
costs and expenses, including, to the extent permitted by applicable law,
reasonable attorneys' fees (to include outside counsel fees and all allocated
costs of Bank's in-house counsel to the extent permissible), expended or
incurred by Bank in connection with (a) the negotiation and preparation of this
Agreement and the other Loan Documents, Bank's continued administration hereof
and thereof, and the preparation of any amendments and waivers hereto and
thereto, (b) the enforcement of Bank's rights and/or the collection of any
amounts which become due to

 

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Bank under any of the Loan Documents, whether or not suit is brought, and
(c) the prosecution or defense of any action in any way related to any of the
Loan Documents, including without limitation, any action for declaratory relief,
whether incurred at the trial or appellate level, in an arbitration proceeding
or otherwise, and including any of the foregoing incurred in connection with any
bankruptcy proceeding (including without limitation, any adversary proceeding,
contested matter or motion brought by Bank or any other person) relating to
Borrower or any other person or entity. Notwithstanding anything in this
Agreement to the contrary, reasonable attorneys' fees shall not exceed the
amount permitted by law. Whenever in this Agreement and the other Loan Documents
Borrower is obligated to pay for the attorneys' fees of Bank, or the phrase
"reasonable attorneys' fees" or a similar phrase is used, it shall be Borrower's
obligation to pay the attorneys' fees actually incurred or allocated, at
standard hourly rates, without regard to any statutory interpretation, which
shall not apply, Borrower hereby waiving the application of any such statute.

 

SECTION 7.4.        SUCCESSORS, ASSIGNMENT. This Agreement shall be binding upon
and inure to the benefit of the heirs, executors, administrators, legal
representatives, successors and assigns of the parties; provided however, that
Borrower may not assign or transfer its interests or rights hereunder without
Bank's prior written consent. Bank reserves the right to sell, assign, transfer,
negotiate or grant participations in all or any part of, or any interest in,
Bank's rights and benefits under each of the Loan Documents. In connection
therewith, Bank may disclose all documents and information which Bank now has or
may hereafter acquire relating to any credit subject hereto, Borrower or its
business, any guarantor hereunder or the business of such guarantor, if any, or
any collateral required hereunder.

 

SECTION 7.5.        ENTIRE AGREEMENT; AMENDMENT. To the full extent permitted by
law, this Agreement and the other Loan Documents constitute the entire agreement
between Borrower and Bank with respect to each credit subject hereto and
supersede all prior negotiations, communications, discussions and correspondence
concerning the subject matter hereof. This Agreement may be amended or modified
only in writing signed by each party hereto.

 

SECTION 7.6.        NO THIRD PARTY BENEFICIARIES. This Agreement is made and
entered into for the sole protection and benefit of the parties hereto and their
respective permitted successors and assigns, and no other person or entity shall
be a third party beneficiary of, or have any direct or indirect cause of action
or claim in connection with, this Agreement or any other of the Loan Documents
to which it is not a party.

 

SECTION 7.7.        TIME. Time is of the essence of each and every provision of
this Agreement and each other of the Loan Documents.

 

SECTION 7.8.        SEVERABILITY OF PROVISIONS. If any provision of this
Agreement shall be prohibited by or invalid under applicable law, such provision
shall be ineffective only to the extent of such prohibition or invalidity
without invalidating the remainder of such provision or any remaining provisions
of this Agreement.

 

SECTION 7.9.        COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which when executed and delivered shall be deemed to be
an original, and all of which when taken together shall constitute one and the
same Agreement.

 

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SECTION 7.10.        GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of Iowa (such State, Commonwealth or
District is referred to herein as the “State”), but giving effect to federal
laws applicable to national banks, without reference to the conflicts of law or
choice of law principles thereof.

 

SECTION 7.11.        BUSINESS PURPOSE. Borrower represents and warrants that
each credit subject hereto is made for (a) a business, commercial, investment,
agricultural or other similar purpose, (b) the purpose of acquiring or carrying
on a business, professional or commercial activity, or (c) the purpose of
acquiring any real or personal property as an investment and not primarily for a
personal, family or household use.

 

SECTION 7.12.        RIGHT OF SETOFF; DEPOSIT ACCOUNTS. Upon and after the
occurrence of an Event of Default, (a) Borrower hereby authorizes Bank, at any
time and from time to time, without notice, which is hereby expressly waived by
Borrower, and whether or not Bank shall have declared any credit subject hereto
to be due and payable in accordance with the terms hereof, to set off against,
and to appropriate and apply to the payment of, Borrower's obligations and
liabilities under the Loan Documents (whether matured or unmatured, fixed or
contingent, liquidated or unliquidated), any and all amounts owing by Bank to
Borrower (whether payable in U.S. dollars or any other currency, whether matured
or unmatured, and in the case of deposits, whether general or special (except
trust and escrow accounts), time or demand and however evidenced), and (b)
pending any such action, to the extent necessary, to hold such amounts as
collateral to secure such obligations and liabilities and to return as unpaid
for insufficient funds any and all checks and other items drawn against any
deposits so held as Bank, in its sole discretion, may elect. Bank may exercise
this remedy regardless of the adequacy of any collateral for the obligations of
Borrower to Bank and whether or not the Bank is otherwise fully secured.
Borrower hereby grants to Bank a security interest in all deposits and accounts
maintained with Bank to secure the payment of all obligations and liabilities of
Borrower to Bank under the Loan Documents.

 

SECTION 7.13.        ARBITRATION.

 

(a)        Arbitration. The parties hereto agree, upon demand by any party, to
submit to binding arbitration all claims, disputes and controversies between or
among them (and their respective employees, officers, directors, attorneys, and
other agents), whether in tort, contract or otherwise in any way arising out of
or relating to (i) any credit subject hereto, or any of the Loan Documents, and
their negotiation, execution, collateralization, administration, repayment,
modification, extension, substitution, formation, inducement, enforcement,
default or termination; or (ii) requests for additional credit. In the event of
a court ordered arbitration, the party requesting arbitration shall be
responsible for timely filing the demand for arbitration and paying the
appropriate filing fee within 30 days of the abatement order or the time
specified by the court. Failure to timely file the demand for arbitration as
ordered by the court will result in that party’s right to demand arbitration
being automatically terminated.

 

(b)        Governing Rules. Any arbitration proceeding will (i) proceed in a
location in the State selected by the American Arbitration Association (“AAA”);
(ii) be governed by the Federal Arbitration Act (Title 9 of the United States
Code), notwithstanding any conflicting choice of law provision in any of the
documents between the parties; and (iii) be conducted by the AAA, or such other
administrator as the parties shall mutually agree upon, in accordance with the
AAA’s commercial dispute resolution procedures, unless the claim or counterclaim
is at least $1,000,000.00 exclusive of claimed interest, arbitration fees and
costs in which case the arbitration shall be conducted in accordance with the
AAA’s optional procedures for large, complex commercial disputes (the commercial
dispute resolution procedures or the optional procedures for large, complex
commercial disputes to be referred to herein, as applicable, as

 

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the “Rules”). If there is any inconsistency between the terms hereof and the
Rules, the terms and procedures set forth herein shall control. Any party who
fails or refuses to submit to arbitration following a demand by any other party
shall bear all costs and expenses incurred by such other party in compelling
arbitration of any dispute. Nothing contained herein shall be deemed to be a
waiver by any party that is a bank of the protections afforded to it under 12
U.S.C. §91 or any similar applicable state law.

 

(c)        No Waiver of Provisional Remedies, Self-Help and Foreclosure. The
arbitration requirement does not limit the right of any party to (i) foreclose
against real or personal property collateral; (ii) exercise self-help remedies
relating to collateral or proceeds of collateral such as setoff or repossession;
or (iii) obtain provisional or ancillary remedies such as replevin, injunctive
relief, attachment or the appointment of a receiver, before during or after the
pendency of any arbitration proceeding. This exclusion does not constitute a
waiver of the right or obligation of any party to submit any dispute to
arbitration or reference hereunder, including those arising from the exercise of
the actions detailed in sections (i), (ii) and (iii) of this paragraph.

 

(d)        Arbitrator Qualifications and Powers. Any arbitration proceeding in
which the amount in controversy is $5,000,000.00 or less will be decided by a
single arbitrator selected according to the Rules, and who shall not render an
award of greater than $5,000,000.00. Any dispute in which the amount in
controversy exceeds $5,000,000.00 shall be decided by majority vote of a panel
of three arbitrators; provided however, that all three arbitrators must actively
participate in all hearings and deliberations. The arbitrator will be a neutral
attorney licensed in the State or a neutral retired judge of the state or
federal judiciary of the State, in either case with a minimum of ten years
experience in the substantive law applicable to the subject matter of the
dispute to be arbitrated. The arbitrator will determine whether or not an issue
is arbitratable and will give effect to the statutes of limitation in
determining any claim. In any arbitration proceeding the arbitrator will decide
(by documents only or with a hearing at the arbitrator's discretion) any
pre-hearing motions which are similar to motions to dismiss for failure to state
a claim or motions for summary adjudication. The arbitrator shall resolve all
disputes in accordance with the substantive law of the State and may grant any
remedy or relief that a court of such state could order or grant within the
scope hereof and such ancillary relief as is necessary to make effective any
award. The arbitrator shall also have the power to award recovery of all costs
and fees, to impose sanctions and to take such other action as the arbitrator
deems necessary to the same extent a judge could pursuant to the Federal Rules
of Civil Procedure, the corresponding rules of civil practice and procedure
applicable in the State or other applicable law. Judgment upon the award
rendered by the arbitrator may be entered in any court having jurisdiction. The
institution and maintenance of an action for judicial relief or pursuit of a
provisional or ancillary remedy shall not constitute a waiver of the right of
any party, including the plaintiff, to submit the controversy or claim to
arbitration if any other party contests such action for judicial relief.

 

(e)        Discovery. In any arbitration proceeding, discovery will be permitted
in accordance with the Rules. All discovery shall be expressly limited to
matters directly relevant to the dispute being arbitrated and must be completed
no later than 20 days before the hearing date. Any requests for an extension of
the discovery periods, or any discovery disputes, will be subject to final
determination by the arbitrator upon a showing that the request for discovery is
essential for the party's presentation and that no alternative means for
obtaining information is available.

 

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(f)        Class Proceedings and Consolidations. No party hereto shall be
entitled to join or consolidate disputes by or against others in any
arbitration, except parties who have executed any Loan Document, or to include
in any arbitration any dispute as a representative or member of a class, or to
act in any arbitration in the interest of the general public or in a private
attorney general capacity.

 

(g)        Payment Of Arbitration Costs And Fees. The arbitrator shall award all
costs and expenses of the arbitration proceeding.

 

(h)        Miscellaneous. To the maximum extent practicable, the AAA, the
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose the
existence, content or results thereof, except for disclosures of information by
a party required in the ordinary course of its business or by applicable law or
regulation. If more than one agreement for arbitration by or between the parties
potentially applies to a dispute, the arbitration provision most directly
related to the Loan Documents or the subject matter of the dispute shall
control. This arbitration provision shall survive termination, amendment or
expiration of any of the Loan Documents or any relationship between the parties.

 

(i)        Small Claims Court. Notwithstanding anything herein to the contrary,
each party retains the right to pursue in Small Claims Court any dispute within
that court’s jurisdiction. Further, this arbitration provision shall apply only
to disputes in which either party seeks to recover an amount of money (excluding
attorneys’ fees and costs) that exceeds the jurisdictional limit of the Small
Claims Court.

 

IMPORTANT:  READ BEFORE SIGNING. THE TERMS OF THIS AGREEMENT SHOULD BE READ
CAREFULLY BECAUSE ONLY THOSE TERMS IN WRITING ARE ENFORCEABLE. NO OTHER TERMS OR
ORAL PROMISES NOT CONTAINED IN THIS WRITTEN CONTRACT MAY BE LEGALLY ENFORCED.
YOU MAY CHANGE THE TERMS OF THIS AGREEMENT ONLY BY ANOTHER WRITTEN AGREEMENT.
THIS NOTICE ALSO APPLIES TO ANY OTHER CREDIT AGREEMENTS NOW IN EFFECT BETWEEN
YOU AND THIS LENDER.

 

IN WITNESS WHEREOF, the parties hereto, intending to be legally bound hereby,
have caused this Agreement to be executed as of the day and year first written
above.

 

FLEXSTEEL INDUSTRIES, INC.   WELLS FARGO BANK,
  NATIONAL ASSOCIATION       By:   /s/Timothy E. Hall   By:   /s/ James J.
Hilgenberg   TIMOTHY E. HALL, SR. VP FINANCE,     JAMES J. HILGENBERG,   CFO,
SECRETARY, TREASURER     VICE PRESIDENT

 

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