Document:

exv10w1

EXHIBIT 10.1

LOAN AGREEMENT

     This Loan Agreement (“Agreement”) is made this 26th day of August 2008, by and between WSI
Industries, Inc., a Minnesota corporation (the “Borrower”) and M&I Marshall & Ilsley Bank, a
Wisconsin state banking corporation (the “Bank”), and the Borrower and the Bank hereby agree as
follows:

ARTICLE I

DEFINITIONS

     Section 1.01 Definitions. For all purposes of this Agreement, except as otherwise expressly
provided or unless the context otherwise requires:

     (a) the terms defined in this Article have the meanings assigned to them in this Article, and
include the plural as well as the singular; and

     (b) all accounting terms not otherwise defined herein have the meanings assigned to them in
accordance with generally accepted accounting principles.

     “Accounts” means, as to any Person, the aggregate unpaid obligations of customers and other
account debtors to such Person arising out of the sale or lease of goods or rendition of services
by such Person on an open account or deferred payment basis.

     “Advance” means an advance by the Bank to the Borrower pursuant to Article II.

     “Commitment” means One Million Two Hundred Thousand and 00/100 ($1,200,000.00) Dollars under
the Loan as evidenced by the Note.

     “Current Assets” of any Person means the aggregate amount of assets of such Person which in
accordance with generally accepted accounting principles may be properly classified as current
assets, after deducting adequate reserves where proper, but in no event including any real estate.

     “Current Liabilities” of any Person means (i) all Debt of such Person due on demand or within
one year from the date of determination thereof, and (ii) all other items (including taxes accrued
as estimated) which, in accordance with generally accepted accounting principles, may be properly
classified as current liabilities.

     “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.

 

 

     “Event of Default” has the meaning specified in Section 7.01.

     “Funded Debt”, with respect to any Person, means all Debt of such Person maturing by its terms
more than one year after, or which is renewable or extendable at the option of such Person for a
period ending one year or more after, the date of determination, and shall include Debt of such
maturity created, assumed or guaranteed by such Person either directly or indirectly, including
obligations of such maturity secured by liens upon property of such Person and upon which such
entity customarily pays the interest, and all rental payments under capitalized leases of such
maturity.

     “Loan” means the sums advanced under the Note pursuant to Article II hereof.

     “Net Worth” means the aggregate of capital and surplus of the Borrower, all determined in
accordance with generally accepted accounting principles.

     “Note” has the meaning specified in Section 2.02.

     “Person” means any individual, corporation, partnership, joint venture, association,
joint-stock company, trust, unincorporated organization or government or any agency or political
subdivision thereof.

     “Plan” means an employee benefit plan or other plan maintained for employees of the Borrower
and covered by Title IV of the Employee Retirement Income Security Act of 1974, as amended.

     “Reportable Event” shall have the meaning assigned to that term in Title IV of the Employee
Retirement Income Security Act of 1974, as amended.

     “Security Agreement” means the security agreement of the Borrower in a form acceptable to the
Bank.

     “Subsidiary” means any corporation of which more than 50% of the outstanding shares of capital
stock have general voting power under ordinary circumstances to elect a majority of the board of
directors of such corporation, irrespective of whether or not at the time stock of any other class
or classes shall have or might have voting power by reason of the happening of any contingency, is
at the time directly or indirectly owned by the Borrower, by the Borrower and one or more other
Subsidiaries, or by one or more other Subsidiaries:

     “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;

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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 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.

     “Working Capital” of any Person means the excess of the Current Assets over the Current
Liabilities of such Person, as determined in accordance with generally accepted accounting
principles.

ARTICLE II

AMOUNT AND TERMS OF THE TERM LOAN

     Section 2.01 Term Loan and Term Note. The Bank agrees, on the terms and subject to the
conditions hereinafter set forth, to make Advances to the Borrower on a non-revolving basis from
time to time during the period from the date hereof to May 31, 2009 or the earlier date of
termination in whole of the Commitment pursuant Section 7.02, in an aggregate amount not to exceed
One Million Two Hundred Thousand and 00/100 ($1,200,000.00) Dollars, whichever is less. Each
Advance shall be in the amount of $10,000.00 or an integral multiple thereof. This is
non-revolving loan, and the Borrower is not permitted to re-borrow any principal which Borrower may
have repaid.. The Advances made by the Bank shall be evidenced by and repayable with interest in
accordance with a single promissory note of the Borrower (the “ Note”) payable to the order of the
Bank, substantially in a form acceptable to the Bank, dated the date of this Agreement. The Note
shall bear interest on the unpaid principal amount thereof from the date thereof until paid at the
rate therein provided.

     Section 2.02 Making the Loan. Each Advance shall be made on at least one bank business days’
prior written notice from the Borrower to the Bank or telephonic request from any person authorized
to request Advances on behalf of the Borrower, which notice or request shall specify the date of
the requested Advance and the amount thereof. The persons authorized to make such requests for
Advances are described in the Resolution of Borrower delivered to the Bank herewith, and such
persons are subject to change by the Borrower upon delivery of new Resolutions of the Borrower in
writing to the Bank. Upon fulfillment of the applicable conditions set forth in Article III, the
Bank may disburse the amount of the requested Advance by crediting the same to the Borrower’s
demand deposit account maintained with the Bank or in such other manner as the Bank and the
Borrower may from time to time agree. The Borrower shall promptly confirm each telephonic request
for an Advance by executing and delivering an appropriate confirmation certificate to the Bank.
Any request for an Advance by the Borrower, whether written or telephonic, shall be deemed to be a
representation that the statements set forth in Section 3.02 are correct.

     Section 2.03 Commitment Fees. There are no commitment fees payable by the Borrower

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hereunder.

     Section 2.04 Computation of Interest and Fees. Interest under the Note shall be computed on
the basis of actual number of days elapsed in a year of 360 days.

     Section 2.05 Payment. All payments of principal and interest under the Note and of the fees
hereunder shall be made to the Bank in immediately available funds. Borrower agrees that the
amount shown on the books and records of the Bank, as being the aggregate amount of Advances
outstanding shall be prima facie evidence of the principal amount of the Note then outstanding.
The Borrower hereby authorizes the Bank, if and to the extent payment is not promptly made pursuant
hereto, to charge against the Borrower’s account with the Bank an amount equal to the accrued
interest and fees from time to time due and payable to the Bank under the Note or hereunder.

     Section 2.06 Payment on Non-Business Days. Whenever any payment to be made hereunder or under
a Note shall be stated to be due on a Saturday, Sunday or a holiday for banks under the laws of the
State of Minnesota, such payment may be made on the next succeeding bank business day, and such
extension of time shall in such case be included in the computation of payment of interest on the
Note or the fees hereunder, as the case may be.

     Section 2.07 Use of Proceeds. The proceeds of the Loan shall be used by the Borrower for
general corporate working capital purposes of the Borrower.

ARTICLE III

CONDITIONS OF LENDING

     Section 3.01 Conditions Precedent to the Initial Advance. The obligation of the Bank to make
its initial Advance, whether pursuant to the Note, is subject to the condition precedent that the
Bank shall have received on or before the day of such Advance all of the following, each dated
(unless otherwise indicated) such day, in form and substance satisfactory to the Bank:

     (a) The Note, properly executed on behalf of the Borrower.

     (b) In addition to the foregoing, the obligation of the Bank to make its initial Advance
pursuant to the Note shall be conditioned upon the Bank receiving such other documents as the Bank
or its legal counsel may reasonably deem necessary to document the Loans.

     Section 3.02 Conditions Precedent to All Advances. The obligation of the Bank to make any
Advance shall be subject to the further conditions precedent that on the date of such Advance:

     (a) the representations and warranties contained in Article IV are correct on and as of the
date of such Advance as though made on and as of such date, except to the extent that such
representations and warranties relate solely to an earlier date; and

     (b) no event has occurred and is continuing, or would result from such Advance, which
constitutes an Event of Default or would constitute an Event of Default but for the requirement
that

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notice be given or time elapse or both.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES

     The Borrower represents and warrants to the Bank as follows:

     Section 4.01 Corporate Existence and Power. The Borrower is a corporation duly incorporated,
validly existing and in good standing under the laws of Minnesota, its jurisdiction of
incorporation, and is duly licensed or qualified to transact business in all jurisdictions where
the character of the property owned or leased or the nature of the business transacted by it makes
such licensing or qualification necessary. The Borrower has all requisite power and authority,
corporate or otherwise, to conduct its business, to own its properties and to execute and deliver,
and to perform all of its obligations under this Agreement, the Note and the Security Agreement.

     Section 4.02 Authorization of Borrowing; No Conflict as to Law of Agreements. The execution,
delivery and performance by the Borrower of this Agreement, the Note and the Security Agreement and
the borrowings from time to time hereunder have been duly authorized by all necessary corporate
action and do and will not (i) require any consent or approval of the stockholders of the Borrower,
or any authorization, consent or approval by any governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, (ii) violate any provision of any law, rule
or regulation (including, without limitation, Regulation X of the Board of Governors of the Federal
Reserve System) or of any order, writ, injunction or decree presently in effect having
applicability to the Borrower or to the Articles of Incorporation or Bylaws of the Borrower, (iii)
result in a breach of or constitute a default under any indenture or loan or credit agreement or
any other agreement, lease or instrument to which the Borrower is a party or by which it or its
properties may be bound or affected, or (iv) result in, or require, the creation or imposition of
any mortgage, deed of trust, pledge, lien, security interest or other charge or encumbrance of any
nature (other than the Security Agreement) upon or with respect to any of the properties now owned
or hereafter acquired by the Borrower.

     Section 4.03 Legal Agreements. This Agreement and the Security Agreement constitute, and the
Note, when executed and delivered by the Borrower hereunder, will constitute the legal, valid and
binding obligations of the Borrower enforceable against the Borrower in accordance with their
respective terms.

     Section 4.04 Subsidiaries. The borrower has the following Subsidiaries Taurus Numeric Tool,
Inc., a Minnesota corporation and WSI Rochester, Inc. a Minnesota corporation.

     Section 4.05 Financial Condition. The Borrower has heretofore furnished financial statements
to the Bank for the fiscal years ended on the last business day of August of each of, 2007 and
2006. Said balance sheets and said statements of income and surplus fairly present the financial
condition of the Borrower on the dates thereof and the results of their operations for the periods
then ended, and were prepared in accordance with generally accepted accounting principles.

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     Section 4.06 Adverse Change. There has been no material adverse change in the business,
properties or condition (financial or otherwise) of the Borrower since the date of the latest
financial
statement referred to in Section 4.05.

     Section 4.07 Litigation. There are no actions, suits or proceedings pending or, to the
knowledge of the Borrower, threatened against or affecting the Borrower or the properties of the
Borrower before any court or governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, which, if determined adversely to the Borrower, would have a
material adverse effect on the financial condition, properties, or operations of the Borrower.

     Section 4.08 Regulation U. The borrower is not engaged in the business of extending credit
for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U of the
Board of Governors of the Federal Reserve System), and no part of the proceeds of any Advance will
be used to purchase or carry any margin stock or to extend credit to others for the purpose of
purchasing or carrying any margin stock.

     Section 4.09. Taxes. The Borrower has filed all federal, state and local tax returns which
to the knowledge of the officers of the Borrower are required to be filed, and the Borrower has
paid or caused to be paid to the respective taxing authorities all taxes as shown on said returns
or on any assessment received by it to the extent such taxes have become due.

     Section 4.10 Title and Liens. The Borrower has good title to each of the properties and
assets reflected in the latest balance sheet referred to in Section 4.05, free and clear of all
mortgages, security interests, liens and encumbrances, except for mortgages, security interests and
liens permitted by Section 6.01 and covenants, restrictions, rights, easements and minor
irregularities in title which do not materially interfere with the business or operations of the
Borrower as presently conducted.

     Section 4.11 Retirement Programs. No Reportable Event has occurred and is continuing with
respect to any Plan.

ARTICLE V

AFFIRMATIVE COVENANTS OF THE BORROWER

     So long as the Note shall remain unpaid or the Commitment shall be outstanding, the Borrower
will comply with the following requirements, unless the Bank shall otherwise consent in writing:

     Section 5.01 Financial Statements. The Borrower will deliver to the Bank:

	 	(a)	 	as soon as available, and in any event within ninety (90) days
after the end of each fiscal year of the Borrower, a copy of the financial
statements of the Borrower audited by independent certified public accountants
selected by the Borrower and acceptable to the Bank, which shall include the
balance sheet of the Borrower as at the end of such fiscal year and the related
statements of 

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	 	 	 	income, retained earnings and changes in financial position of
the Borrower 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 referred to in Section 4.05, 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 5.08 through 5.11 hereof
(in making such report, Borrower shall provide to Lender the completed Covenant
Compliance Certificate in the form attached hereto as Exhibit A).

	 	(b)	 	as soon as available and in any event within thirty (30) days
after the end of each calendar quarter, balance sheets of the Borrower as at
the end of such calendar quarter and related statements of earnings and
retained earnings of the Borrower for such calendar quarter 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 4.05 and certified by the chief financial officer of the
Borrower; 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 4.05, 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 5.08
through 5.11 hereof (in making such report, Borrower shall provide to Lender
the completed Covenant Compliance Certificate in the form attached hereto as
Exhibit A).
	 
	 	(c)	 	immediately after the commencement thereof, notice in writing
of all litigation and of all proceedings before any governmental or regulatory
agency affecting the Borrower of the type described in Section 4.07 or which
seek a monetary recovery against the Borrower in excess of $50,000.00;
	 
	 	(d)	 	as promptly as practicable (but in any event not later than
five (5) business days) after an officer of the Borrower obtains knowledge of
the occurrence of any 

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	 	 	 	event which constitutes an Event of Default or would
constitute an Event of Default with the passage of time or the giving of
notice, or both, notice of such occurrence, together with a detailed statement
by a responsible officer of the Borrower of the steps being taken by the
Borrower to cure the effect of such event;

	 	(e)	 	as soon as possible and in any event within thirty (30) days
after the Borrower knows or has reason to know that any Reportable Event with
respect to any Plan has occurred, the statement of the chief financial officer
of the Borrower setting forth details as to such Reportable Event and the
action which the Borrower proposes to take with respect thereto, together with
a copy of the notice of such Reportable Event to the Pension Benefit Guaranty
Corporation;
	 
	 	(f)	 	as soon as possible after such occurrence, Borrower shall
provide the Bank with notice of any amendment of its Articles of Incorporation
or of any material change in the Borrower or its operations; and
	 
	 	(g)	 	such other information respecting the financial condition and
results of operations of the Borrower as the Bank may from time to time
reasonably request.

     Section 5.02 Books and Records; Inspection and Examination. The Borrower will keep accurate
books of record and account for itself in which true and complete entries will be made in
accordance with generally accepted accounting principles consistently applied and, upon request of
the Bank, will give any representative of the Bank access to, and permit such representative to
examine, copy or make extracts from, any and all books, records and documents in its possession, to
inspect any of its properties and to discuss its affairs, finances and accounts with any of its
principal officers, all at such times during normal business hours and as often as the Bank may
reasonably request.

     Section 5.03 Compliance with Laws. The Borrower will comply with the requirements of
applicable laws and regulations, the non-compliance with which would materially and adversely
affect its business or its financial condition.

     Section 5.04 Payment of Taxes and Other Claims. The Borrower will pay or discharge all
taxes, assessments and governmental charges levied or imposed upon it or upon its income or
profits, or upon any properties belonging to it, prior to the date on which penalties attach
thereto and all lawful claims for labor, materials and supplies which, if unpaid, might by law
become a lien or charge upon any properties of the Borrower; provided, that except as may be
provided in any Mortgage executed in conjunction herewith the Borrower shall not be required to pay
any such tax, assessment, charge or claim whose amount, applicability or validity is being
contested in good faith by appropriate proceedings.

     Section 5.05 Maintenance of Properties. The Borrower will keep and maintain all of its
properties necessary or useful in its business in good condition, repair and working order;
provided, however, that except as may be provided in any Mortgage executed in conjunction

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herewith
nothing in this Section shall prevent the Borrower from discontinuing the operation and maintenance
of any of its properties if such discontinuance is, in the judgment of the Borrower, desirable in
the conduct of its business and not disadvantageous in any material respect to the Bank as holder
of a Note.

     Section 5.06 Insurance. The Borrower will obtain and maintain insurance with insurers
believed by the Borrower to be responsible and reputable, in such amounts and against such risks as
is usually carried by companies engaged in similar business and owning similar properties in the
same general areas in which the Borrower operates.

     Section 5.07 Preservation of Corporate Existence. The Borrower will preserve and maintain
its corporate existence and all of its rights, privileges and franchises; provided, however, that
the Borrower shall not be required to preserve any of its rights, privileges and franchises if its
Board of Directors shall determine that the preservation thereof is no longer desirable in the
conduct of the business of the Borrower and that the loss thereof is not disadvantageous in any
material respect to the Bank as a holder of a Note.

     Section 5.08 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 Seven Million Five Hundred Thousand and no/100
Dollars ($7,500,000.00).

     Section 5.09 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 to 1, which ratio shall be tested at the end of each fiscal quarter of
Borrower.

     Section 5.10 Ratio of Current Assets to Current Liabilities. The Borrower shall maintain, for
each fiscal quarter end that the Note remains outstanding or the Bank shall have any Commitment
hereunder, the ratio of its Current Assets to its Current Liabilities added to its outstanding debt
under the Note at not less than 1.5 to 1.

     Section 5.11 Debt Service Coverage Ratio. So long as the Note shall remain unpaid or the Bank
shall have any Commitment hereunder, the Borrower will maintain an annual ratio of earnings before
interest, taxes, depreciation and amortization, less distributions to shareholders, all for the
same specified period to annual principal and interest payments due on all Debt of the Borrower of
not less than 1.25 to 1 as of the last business day of each August, beginning on the last business
day of August, 2008, as determined in accordance with generally recognized accounting principles
consistently applied.

ARTICLE VI

NEGATIVE COVENANTS

     So long as the Note shall remain unpaid or the Bank shall have any Commitment hereunder, the
Borrower agrees that, without the prior written consent of the Bank:

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     Section 6.01 Liens. The Borrower will not create, incur or suffer to exist any mortgage,
deed of trust, pledge, lien, security interest, assignment or transfer upon or of any of its
assets, now owned or hereafter acquired, to secure any indebtedness for borrowed money; excluding,
however, from the operation of the foregoing:

	 	(a)	 	mortgages, deeds of trust, pledges, liens, security
interests and assignments securing any indebtedness incurred in the
ordinary course of business of the Borrower; however notwithstanding
anything to the contrary herein Borrower
shall allow no such encumbrances in connection with the borrowing of money or
the acceptance of an advance of credit; and
	 
	 	(b)	 	the security interest granted to the Bank under the Security Agreement.

     Section 6.02 Indebtedness. The Borrower will not incur, create, assume or permit to exist
any indebtedness or liability on account of deposits or advances or any indebtedness for borrowed
money, or any other indebtedness or liability evidenced by notes, bonds, debentures or similar
obligations, except:

	 	(a)	 	indebtedness evidenced by the Note;
	 
	 	(b)	 	Trade credit and short term leases;
	 
	 	(c)	 	Capital leases, so long as Borrower remains in compliance
with Section 6.08 hereof;
	 
	 	(d)	 	Indebtedness of the Borrower in existence on the date
hereof, but not including any extensions or renewals thereof; and

     Section 6.03 Guaranties. The Borrower will not assume, guarantee, endorse
or otherwise become directly or contingently liable in connection with any obligations of any other
Person, except: the indorsement of negotiable instruments by the Borrower for deposit or collection
or similar transactions in the ordinary course of business.

     Section 6.04 Sale of Assets. The Borrower will not sell, lease, assign, transfer or
otherwise dispose of assets exceeding 10% or more of the book value of its assets as of the date of
such transaction to any other Person other than in the ordinary course of business or in the event
such assets are obsolete or worn-out assets, without the prior written consent of the Bank.

     Section 6.05 Consolidation and Merger. The Borrower will not consolidate with or merge into
any Person, or permit any other Person to merge into it, or acquire (in a transaction analogous in
purpose or effect to a consolidation or merger) all or substantially all the assets of any other
Person.

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     Section 6.06 Sale and Leaseback. The Borrower will not enter into any arrangement, directly
or indirectly, with any other Person whereby the Borrower shall sell or transfer any real or
personal property, whether now owned or hereafter acquired, and then or thereafter rent or lease as
lessee such property or any part thereof or any other property which the Borrower intends to use
for substantially the same purpose or purposes as the property being sold or transferred.

     Section 6.07 Restrictions on Nature of Business. The Borrower will not engage in any line of
business materially different from that presently engaged in by the Borrower.

     Section 6.08 Capital Expenditures. So long as the Note shall remain unpaid or the Bank shall
have any Commitment hereunder, Borrower shall make no capital expenditures in an aggregate amount
in excess of Four Million and no/100 Dollars ($4,000,000.00) in any fiscal year of Borrower year.

ARTICLE VII

EVENTS OF DEFAULT, RIGHTS AND REMEDIES

          Section 7.01 Events of Default. “Events of Default”, wherever used herein, means any one of
the following events:

     (a) Default in the payment of any sums payable on the Note when it becomes due and
payable and continuance of such default for a period of 10 days; or

     (b) Default in the payment of fees, if any required under Section 2.05 when the
same become due and payable and the continuance of such default for a period of 10 days;
or

     (c) Any representation or warranty made by the Borrower in this Agreement or by
the Borrower (or any of its officers) in any certificate, instrument, or statement
contemplated by or made or delivered pursuant to or in connection with this Agreement,
shall prove to have been incorrect in any material respect when made; or

     (d) Default in the performance, or breach, of any covenant or agreement of the
Borrower in this Agreement (other than a covenant or agreement a default in whose
performance or whose breach is elsewhere in this Section specifically dealt with), any
security agreement or any other instrument or agreement signed by the Borrower in favor
of the Bank, and the continuance of such default or breach for a period of 10 days after
there has been given, by certified mail to the Borrower by the Bank, a written notice
specifying such default or breach and requiring it to be remedied; or

     (e) The Borrower shall be adjudicated a bankrupt or insolvent, or admit in writing
its inability to pay its debts as they mature, or make an assignment for the benefit of
creditors; or the Borrower shall apply for or consent to the appointment of any
receiver, trustee, or similar officer for it or for all or any substantial part of its
property; or such receiver, trustee or similar officer shall be appointed without the
application or

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consent of the Borrower and such appointment shall continue undischarged
for a period of 30 days; or the Borrower shall institute (by petition, application,
answer, consent or otherwise) any bankruptcy, insolvency, reorganization, arrangement,
readjustment of debt, dissolution, liquidation or similar proceeding relating to it
under the laws of any jurisdiction; or any such proceeding shall be instituted (by
petition, application or otherwise) against the Borrower and shall remain undismissed
for a period of 30 days; or any judgment, writ, warrant of attachment or execution or
similar process shall be issued or levied against a substantial part of the property of
the Borrower and such judgment, writ, or similar process shall not be released, vacated
or fully bonded within 30 days after its issue or levy; or

     (f) Default in the performance, or breach, of any covenant or agreement on the
part of the Borrower in excess of $50,000.00; or

     (g) The rendering against the Borrower of a final judgment, decree or order for
the payment of money in excess of $50,000.00 and the continuance of such judgment,
decree or order unsatisfied and in effect for any period of 60 consecutive days without
a stay of execution; or

     (h) A default under any bond, debenture, note or other evidence of indebtedness of
the Borrower (other than to the Bank) or under any indenture or other instrument under
which any such evidence of indebtedness has been issued or by which it is governed and
the acceleration of payment of such indebtedness; or

     (i) Any Reportable Event, which the Bank determines in good faith might constitute
grounds for the termination of any Plan or for the appointment by the appropriate United
States District Court of a trustee to administer any Plan, shall have occurred and be
continuing 30 days after written notice to such effect shall have been given to the
Borrower by the Bank; or any Plan shall have been terminated, or a trustee shall have
been appointed by an appropriate United States District Court to administer any Plan, or
the Pension Benefit Guaranty Corporation shall have instituted proceedings to terminate
any Plan or to appoint a trustee to administer any Plan; or

     (j) The outstanding and unpaid Advances shall exceed the Borrowing Base and the
Borrower shall fail within 10 days to pay the Advances down to an amount not greater
than the Borrowing Base.

     (k) Adverse conditions develop at any time affecting Borrower’s affairs, financial
or otherwise, and the Bank in good faith determines that such adverse conditions impair
the due and punctual payment of the Note.

     Section 7.02 Rights and Remedies. Upon the occurrence of an Event of Default or at any time
thereafter until such Event of Default is cured to the written satisfaction of the Bank, the Bank
may exercise any or all of the following rights and remedies:

     (a) The Bank may, by notice to the Borrower, declare the
Commitment to be

12

 

	 	 	 	terminated whereupon the same shall forthwith terminate;
	 
	 	(b)	 	The Bank may, by notice to the Borrower, declare the
entire unpaid principal amount of the Note then outstanding, all interest
accrued and unpaid thereon, and all other amounts payable under this
Agreement to be forthwith due and payable, whereupon such Note, all such
accrued interest and all such amounts shall become and be forthwith due and
payable, without presentment, demand, protest or further notice of any kind,
all of which are hereby expressly waived by the Borrower.
	 
	 	(c)	 	The Bank may, without notice to the Borrower and without
further action, apply any and all money owing by the Bank to the Borrower to
the payment of
the Note then outstanding, including interest accrued thereon, and of all
other sums then owing by the Borrower hereunder;
	 
	 	(d)	 	The Bank may exercise and enforce its rights and remedies
under the Security Agreement.; and
	 
	 	(e)	 	The Bank may exercise such other remedies as may be
available to it under law.

ARTICLE VIII

MISCELLANEOUS

          Section 8.01 No Waiver; Cumulative Remedies. No failure or delay on the part of the Bank in
exercising any right, power or remedy hereunder or under the Security Agreement shall operate as a
waiver thereof; nor shall any single or partial exercise of any such right, power or remedy
preclude any other or further exercise thereof or the exercise of any other right, power or remedy
hereunder or under the Security Agreement. The remedies herein and in the Security Agreement
provided are cumulative and not exclusive of any remedies provided by law.

          Section 8.02 Amendments, etc. No amendment, modification, termination or waiver of any
provision of this Agreement, the Security Agreement or the Note or consent by the Borrower to any
departure there from shall be effective unless the same shall be in writing and signed by the Bank
and then such waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given. No notice to or demand on the Borrower in any case shall entitle
the Borrower to any other or further notice or demand in similar or other circumstances.

          Section 8.03 Addresses for Notices, etc. Except as otherwise expressly provided herein, all
notices, requests, demand and other communications provided for hereunder and under the Security
Agreement shall be in writing and mailed or delivered to the applicable party at its address
indicated below:

If to the Borrower:

13

 

WSI Industries, Inc.

213 Chelsea Road

Monticello, MN 55362 

If to the Bank:

M&I Marshall & Ilsley Bank

11455 Viking Drive

Eden Prairie MN 55344

Attention: Skip Orlady

or, as to each party, at such other address as shall be designated by such party in a written
notice to the
other party complying as to delivery with the terms of this Section. All such notices, requests,
demands and other communications shall, when mailed, be effective when deposited in the mails,
addressed as aforesaid, except that notices or requests to the Bank pursuant to any of the
provisions of Article II shall not be effective until received by the Bank.

          Section 8.04 Costs and Expenses. The Borrower agrees to pay on demand all costs and expenses
of the Bank in connection with the preparation of this Agreement, the Note, the Security Agreement
and the other instruments and documents to be delivered hereunder and thereunder, including the
reasonable fees and out-of-pocket expenses of counsel for the Bank with respect thereto, as well as
all out-of-pocket expenses of legal counsel retained by the Bank in connection with the enforcement
of this Agreement, the Note, the Security Agreement and the other instruments and documents to be
delivered hereunder and thereunder.

          Section 8.05 Execution in Counterparts. This Agreement and the Security Agreement may be
executed in any number of counterparts, each of which when so executed and delivered shall be
deemed to be an original and all of which counterparts of this Agreement or the Security Agreement,
as the case may be, taken together, shall constitute but one and the same instrument.

          Section 8.06 Binding Effect, Assignment. This Agreement and the Security Agreement shall be
binding upon and inure to the benefit of the Borrower and the Bank and their respective successors
and assigns, except that the Borrower shall not have the right to assign its rights hereunder or
thereunder or any interest herein or therein without the prior written consent of the Bank.

          Section 8.07 Governing Law. This Agreement, the Note and the Security Agreement shall be
governed by, and construed in accordance with, the laws of the State of Minnesota.

          Section 8.08 Severability of Provisions. Any provision of this Agreement that is prohibited
or unenforceable shall be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof.

          Section 8.09 Headings. Article and Section headings in this Agreement are included herein
for convenience of reference only and shall not constitute a part of this Agreement for any other
purpose.

14

 

     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their
respective officers thereunto duly authorized, as of the date first above written.

	 	 	 	 	 	 	 
	 	 	BORROWER:	 	 
	 
	 	 	 	 	 	 
	 	 	WSI INDUSTRIES, INC., a Minnesota corporation	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Paul D. Sheely	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	     Paul D. Sheely	 	 
	 
	 	 	 	 	 	 
	 

	 	Its:
	 	Vice President/Chief Financial Officer	 	 
	 
	 	 	 	 	 	 
	 

	 	BANK:	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	M&I MARSHALL& ILSLEY BANK a Wisconsin state banking corporation	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Skip Orlady	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	     Skip Orlady	 	 
	 
	 

	 	Its:
	 	S.V.P.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Mary Covert	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	     Mary Covert	 	 
	 
	 

	 	Its:
	 	Vice President	 	 

15

 

EXHIBIT A

Compliance Certificate, Required Quarterly

WSI Industries, Inc.

	 	 	 
	Lender:

	 	M&I Marshall & Ilsley Bank
	 

	 	11455 Viking Drive, Eden Prairie, MN 55344

The undersigned is the Customer under the Sixth Amendment and Modification of Revolving Line of
Credit Promissory Note, Loan Agreement and Reaffirmation of Guaranties (herein called the
“Agreement”) between the undersigned and the Lender. All terms used herein which are defined in
the Agreement shall have the same meaning herein as the Agreement.

Customer hereby reaffirms all warranties made in the Agreement as of the date hereof and certifies
and warrants that the Borrowing Base under the Agreement as of August 26th, 2008 was as follows:

	 	 	 
	Covenants Measured As Noted

	 	as of date:                    

	 	 	 	 	 	 	 	 	 
	 	 	Covenants	 	Actual
	1. Minimum Net Worth

(measured quarterly)
	 	$	7,500,000	 	 	$	                    	 
	 
	 	 	 	 	 	 	 	 
	2. Maximum Total Liabilities/Tangible Net Worth
	 	 	2 : 1	 	 	 	                    	 
	(measured quarterly)
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	3. Minimum Current Ratio
	 	 	1.5:1	 	 	 	                    	 
	(measured quarterly)
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	4. Minimum Debt Service Coverage
	 	 	1.25 : 1	 	 	 	                    	 
	(measured annually)
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	5. Maximum Capital Expenditures
	 	$	4,000,000	 	 	$	                    	 
	(measured annually)
	 	 	 	 	 	 	 	 

Customer further certifies and warrants that no event of Default exists under the Agreement at the
date of this Certificate, and to the best of the knowledge and belief of the officer of Customer
executing this Certificate, there has not been (except as may be otherwise indicated below) any
change since the computation date specified above which would materially reduce the amounts shown
above, if such amounts were computed as of the date of this Certificate.

Date:                                        

Signature:                                         

By: Paul Sheely, VP of Finance, WSI Industries, Inc.

16exv10w2

EXHIBIT 10.2

PROMISSORY NOTE

			
	$1,200,000.00
	 	Minneapolis, Minnesota

August 26, 2008

     FOR VALUE RECEIVED, the undersigned, WSI Industries, Inc., a Minnesota corporation
(“Borrower”), promises to pay to the order of M&I Marshall & Ilsley Bank, a Wisconsin State banking
corporation (“Lender”) at 11455 Viking Drive, Eden Prairie, Minnesota 55344 or at any other place
designated from time to time by the holder hereof, in lawful money of the United States of America,
pursuant to the terms hereof, the principal sum of One Million Two Hundred Thousand and 00/100
($1,200,000.00) Dollars, or so much thereof as may be advanced hereunder, together with interest
thereon at the interest rate defined below (the “Interest Rate”).

     The Interest Rate shall be a variable rate of interest as follows:

	 	1.	 	From the date hereof through May 31, 2009, the Interest Rate
shall be equal to the Base Rate of interest as established by Lender from time
to time (“Base Rate”).
	 
	 	2.	 	From the June 1, through the Maturity Date (as defined below),
the Interest Rate shall be equal to one half of one percent (0.50%) over the
Base Rate.

	 	 	On the date hereof the Base Rate is Five (5.0 %) percent and the initial rate of interest
hereunder is Five (5.0 %) percent. Lender may make loans to other borrowers with an
interest rate above or below the Base Rate. If the Base Rate is no longer established or is
otherwise no longer available the holder of this Note may substitute a reasonably equivalent
index to substitute for the Base Rate. The rate of interest hereunder shall change when,
if, and as often as the Base Rate changes.

     Said principal and interest shall be repaid in monthly payments of all accrued interest on the
sums actually advanced and outstanding hereunder commencing on September 1, 2008 and continuing
monthly thereafter on the first day of each and every month until June 30, 2010 (the “Maturity
Date”), at which time the entire remaining balance due hereunder, including all principal and
accrued but unpaid interest, shall be due and payable in full.

     Payments hereunder shall be applied first to accrued but unpaid interest, then to principal.

     This Note is made in conjunction with and subject to the terms and conditions of a Loan
Agreement (“Loan Agreement”) and related documents and a security agreement (“Security Agreement”)
each of even date herewith. Sums advanced or to be advanced hereunder are subject to the covenants
conditions and restrictions contained in the Loan Agreement and are secured by the collateral
described in the Security Agreement. This Note evidences a non-revolving loan, and

 

 

Borrower may not re-borrow any principal amount repaid by Borrower hereunder.

     If any installment hereof is not paid when due, or if the undersigned shall fail to perform or
observe any obligation binding upon the undersigned under the Security Agreement, the Loan
Agreement or under any other agreement between the undersigned and the holder hereof, or if any
default or event of default shall occur under any such agreement, or if the undersigned or any
guarantor shall become insolvent, shall make an assignment for the benefit of creditors, or a
receiver shall be appointed for any property of any of them or any proceeding shall be commenced
with respect to any of them under any bankruptcy or insolvency laws, or if the holder hereof shall
at any time in good faith believe that the prospect of due and punctual payment of this Note is
impaired, then (in any such event) the holder hereof may, at its option, declare the entire
principal balance then remaining unpaid on this Note to be immediately due and payable, and the
same shall thereupon be immediately due and payable, together with all interest accrued hereon,
without notice or demand.

     Notwithstanding anything to the contrary herein, upon the occurrence of any event or condition
of default hereunder or under any contract, agreement, obligation or liability of the undersigned
in favor of the Lender, Lender, at its option, may if permitted under applicable law, and after any
applicable notice or cure period, increase the variable rate of interest on this Note to two (2.00)
percentage points over and above the otherwise applicable rate under this Note. Under no
circumstances shall the rate of interest hereunder exceed the maximum rate permitted by law.

     If any installment hereunder or other payment due to the Lender is paid more than ten (10)
days after its due date, the undersigned shall owe to the Lender the sum of five (5.00%) percent of
the scheduled installment or payment or Five and 00/100 ($5.00) Dollars, whichever is greater.

     This Note may be prepaid, in whole or part at any time, without premium or penalty but with
interest accrued to the date of prepayment on the principal amount prepaid.

     To the extent permitted by law, the undersigned agrees to pay all costs of collection,
including reasonable attorneys’ fees and legal expenses, incurred by the holder hereof in the event
this Note is not duly paid.

     Presentment or other demand for payment, notice of dishonor and protest are hereby expressly
waived.

	 	 	 	 	 	 	 
	 	 	WSI INDUSTRIES, INC., a Minnesota corporation	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Paul D. Sheely	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	     Paul D. Sheely	 	 
	 
	 	 	 	 	 	 
	 

	 	Its:
	 	Vice President/Chief Financial Officer	 	 

-2-

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