Exhibit 10.2
SECURITY AGREEMENT
     This Security Agreement (as amended, modified or otherwise supplemented
from time to time, this “Security Agreement”), dated as of May 21, 2010, is
executed by the companies as signatories hereto (collectively, “Company”), in
favor of Medtronic, Inc., a Minnesota corporation (“Secured Party”).
RECITALS
     A. Company has executed and delivered to Secured Party a Promissory Note of
even date herewith (as amended, modified or otherwise supplemented from time to
time, the “Note”).
     B. In order to induce Secured Party to extend the credit evidenced by the
Note, Company has agreed to enter into this Security Agreement and to grant to
Secured Party the security interest in the Collateral described below.
AGREEMENT
     NOW, THEREFORE, in consideration of the above recitals and for other good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Company hereby agrees with Secured Party as follows:
     1. Definitions and Interpretation. When used in this Security Agreement,
the following terms have the following respective meanings:
          “Asset(s)” means the Collateral (defined below) and the Intellectual
Property (defined below).
          “Collateral” has the meaning given to that term in Section 2 hereof.
          “Intellectual Property” means all copyright rights, copyright
applications, copyright registrations and like protections in each work of
authorship and derivative work, whether published or unpublished, any patents,
patent applications and like protections, including improvements, divisions,
continuations, renewals, reissues, extensions, and continuations-in-part of the
same, trademarks, service marks and, to the extent permitted under applicable
law, any applications therefor, whether registered or not, and the goodwill of
the business of Company connected with and symbolized thereby, know-how,
operating manuals, trade secret rights, rights to unpatented inventions, and any
claims for damage by way of any past, present, or future infringement of any of
the foregoing.
          “Obligations” means all loans, advances, debts, liabilities and
obligations, howsoever arising, owed by Company to Secured Party of every kind
and description (whether or not evidenced by any note or instrument and whether
or not for the payment of money), now existing or hereafter arising under or
pursuant to the terms of the Notes and the other Loan Documents, including, all
interest, fees, charges, expenses, reasonable attorneys’ fees and costs and
accountants’ fees and costs chargeable to and payable by Company hereunder and
thereunder, in each case, whether direct or indirect, absolute or contingent,
due or to become due, and whether or not arising after the commencement of a
proceeding under Title 11 of the United States Code (11 U.S.C. Section 101 et
seq.), as amended from time to time (including post-petition interest) and
whether or not allowed or allowable as a claim in any such proceeding.

 

--------------------------------------------------------------------------------

 

          “Permitted Liens” means:
     (a) Liens existing on the date hereof and shown on Schedule A or arising
under this Security Agreement and the other Loan Documents;
     (b) Liens for taxes, fees, assessments or other government charges or
levies, either not delinquent or being contested in good faith and for which the
Company maintains adequate reserves on its books, provided that no notice of any
such Lien has been filed or recorded under the Internal Revenue Code of 1986, as
amended, and the Treasury Regulations adopted thereunder;
     (c) purchase money Liens and capital leases (i) on Equipment acquired or
held by Company incurred for financing the acquisition of the Equipment, or
(ii) existing on Equipment when acquired, if the Lien is confined to the
property and improvements and the proceeds of the Equipment;
     (d) Liens incurred in the extension, renewal or refinancing of the
indebtedness secured by Liens described in (a) through (c), but any extension,
renewal or replacement Lien must be limited to the property encumbered by the
existing Lien and the principal amount of the indebtedness then due may not
increase;
     (e) leases or subleases of real property granted in the ordinary course of
business, and leases, subleases, non-exclusive licenses or sublicenses of
property granted in the ordinary course of Company’s business, if the leases,
subleases, licenses and sublicenses do not prohibit granting Secured Party a
security interest;
     (f) banker’s liens, rights of setoff and Liens in favor of financial
institutions incurred made in the ordinary course of business arising in
connection with Company’s deposit accounts or securities accounts held at such
institutions to secure payment of fees and similar costs and expenses;
     (g) Liens to secure payment of workers’ compensation, employment insurance,
old-age pensions, social security and other like obligations incurred in the
ordinary course of business (other than Liens imposed by ERISA);
     (h) Liens arising from judgments, decrees or attachments in circumstances
not constituting an Event of Default under the Note;
     (i) easements, reservations, rights-of-way, restrictions, minor defects or
irregularities in title and similar charges or encumbrances affecting real
property not constituting a material adverse effect on the business or condition
(financial or otherwise) of Company;
     (j) non-exclusive licenses of Intellectual Property granted to third
parties in the ordinary course of business;
     (k) exclusive licenses of Intellectual Property granted to Persons who are
not affiliates of Company in the ordinary course of Company’s business in
connection with joint ventures or corporate collaborations provided that such
exclusive licenses are specifically approved by Company’s board of directors;
     (l) Liens of carriers, warehousemen, suppliers, or other Persons that are
possessory in nature arising in the ordinary course of business so long as such
Liens attach only to Inventory and which are not delinquent or remain payable
without penalty or which are being contested in good faith and by

-2-

--------------------------------------------------------------------------------

 

appropriate proceedings which proceedings have the effect of preventing the
forfeiture or sale of the property subject thereto;
     (m) Liens in favor of customs and revenue authorities arising as a matter
of law to secure payment of custom duties in connection with the importation of
goods by Company;
     (n) Liens on insurance proceeds securing the payment of financed insurance
premiums;
     (o) purported Liens evidences by the filing of precautionary UCC financing
statements relating solely to operating leases of personal property entered into
by Company;
     (p) Liens created under any agreement relating to the sale, transfer or
other disposition of assets permitted under this Agreement; provided that such
Liens relate solely to the assets to be sold, transferred or otherwise disposed
of;
     (q) Liens encumbering cash collateral or other financial assets securing
indebtedness consisting of hedging arrangements permitted hereunder relating to
interest rate, commodity price or foreign exchange rate exposure not entered
into for any speculative purpose;
     (r) Liens on securities that are the subject of repurchase agreements
related to investments by Company; and
     (s) Liens arising from (i) judgments or attachments (or securing of appeal
bonds with respect thereto) in an aggregate amount of less than $100,000 in
circumstances not constituting an Event of Default under the Note.
          “UCC” means the Uniform Commercial Code as in effect in the State of
Minnesota from time to time.
     All capitalized terms not otherwise defined herein shall have the
respective meanings given in the Note. Unless otherwise defined herein, all
terms defined in the UCC have the respective meanings given to those terms in
the UCC.
     2. Grant of Security Interest. As security for the Obligations, upon the
first Advance under the Note, Company hereby pledges to Secured Party and grants
to Secured Party a security interest in all right, title and interests of
Company in and to the property described in Attachment 1 hereto, whether now
existing or hereafter from time to time acquired (collectively, the
“Collateral”).
     3. General Representations and Warranties. Company represents and warrants
to Secured Party that (a) Company is the owner of the Collateral (or, in the
case of after-acquired Collateral, at the time Company acquires rights in the
Collateral, will be the owner thereof) and that no other Person has (or, in the
case of after-acquired Collateral, at the time Company acquires rights therein,
will have) any right, title, claim or interest (by way of Lien or otherwise) in,
against or to the Collateral, other than Permitted Liens; (b) upon the filing of
UCC-1 financing statements in the appropriate filing offices, Secured Party has
(or in the case of after-acquired Collateral, at the time Company acquires
rights therein, will have) a perfected security interest in the Collateral to
the extent that a security interest in the Collateral can be perfected by such
filing, except for Permitted Liens; (c) all Inventory has been (or, in the case
of hereafter produced Inventory, will be) produced in compliance with applicable
laws, including the Fair Labor Standards Act; (d) all accounts receivable and
payment intangibles described in Company’s books and records are genuine and
enforceable against the party obligated to pay the same; (e) the originals of
all documents evidencing all accounts receivable and payment intangibles of
Company and the only original books of account and records of Company relating
thereto are, and will continue to be, kept at the chief

-3-

--------------------------------------------------------------------------------

 

executive office of Company set forth on Schedule A or at such other locations
as Company may establish in accordance with Section 4(d), and (f) all
information set forth in Schedule A hereto is true and correct in all material
respects.
     4. Covenants Relating to the Assets. Company hereby agrees (a) to perform
all acts that may be necessary to maintain, preserve, protect and perfect the
Collateral, the Lien granted to Secured Party therein and the perfection and
priority of such Lien, except for Permitted Liens; (b) not to use or permit any
Asset to be used (i) in violation in any material respect of any applicable law,
rule or regulation, or (ii) in violation of any policy of insurance covering the
Assets; (c) to pay promptly when due all taxes and other governmental charges,
all Liens and all other charges now or hereafter imposed upon or affecting any
Asset (other than any of the foregoing the amount or validity of which is
currently being contested in good faith by appropriate proceedings and with
respect to which reserves have been provided on the books of Company, and other
than taxes, fees, charges or assessments with respect to which the failure to
pay would not have a material adverse effect on Company); (d) without 30 days’
written notice to Secured Party, (i) not to change Company’s name or place of
business (or, if Company has more than one place of business, its chief
executive office), or the office in which Company’s records relating to accounts
receivable and payment intangibles are kept, and (ii) not to change Company’s
state of incorporation, (e) to procure, execute and deliver from time to time
any endorsements, assignments, financing statements and other writings
reasonably deemed necessary or appropriate by Secured Party to perfect, maintain
and protect its Lien hereunder and the priority thereof; (f) to keep separate,
accurate and complete records of the Assets and to provide Secured Party with
such records and such other reports and information relating to the Assets as
Secured Party may reasonably request from time to time; (g) not to surrender or
lose possession of (other than to Secured Party), sell, encumber, lease, rent,
or otherwise dispose of or transfer any Asset or right or interest therein, and
to keep the Assets free of all Liens except Permitted Liens; provided that
Company may sell, lease, transfer, license or otherwise dispose of any of the
Collateral as follows: (i) sales of Inventory in the ordinary course of
business; (ii) dispositions of worn-out or obsolete Equipment; (iii) granting
Permitted Liens; (iv) dispositions of property from one Company to another
Company; (v) dispositions of cash equivalents for cash or other cash
equivalents; (vi) abandonment of non-material intellectual property assets in
the ordinary course of business; (vii) surrender, release or waiver of contract
rights in the ordinary course of business; (viii) sales or other dispositions of
property to the extent that such property is exchanged for credit against the
purchase price of similar replacement property or the proceeds of such sale or
other disposition are promptly applied to the purchase price of such replacement
property; (ix) charitable donations in the ordinary course of business and
consistent with past practices; or (x) other dispositions not otherwise
permitted under the foregoing clauses (i)-(ix), in an amount not to exceed One
Hundred Thousand Dollars ($100,000.00) in any fiscal year; and (h) to comply
with all material requirements of law relating to the production, possession,
operation, maintenance and control of the Collateral (including the Fair Labor
Standards Act).
     5. Authorized Action by Secured Party. Until the termination of the
security interest described in Section 7(b), Company hereby irrevocably appoints
Secured Party as its attorney-in-fact (which appointment is coupled with an
interest) and agrees that Secured Party may perform (but Secured Party shall not
be obligated to and shall incur no liability to Company or any third party for
failure so to do) any act which Company is obligated by this Security Agreement
to perform, and to exercise such rights and powers as Company might exercise
with respect to the Collateral, including the right to (a) collect by legal
proceedings or otherwise and endorse, receive and receipt for all dividends,
interest, payments, proceeds and other sums and property now or hereafter
payable on or on account of the Collateral; (b) enter into any extension,
reorganization, deposit, merger, consolidation or other agreement pertaining to,
or deposit, surrender, accept, hold or apply other property in exchange for the
Collateral; (c) make any compromise or settlement, and take any action it deems
advisable, with respect to the Collateral; (d) insure, process and preserve the
Collateral; (e) pay any indebtedness of Company relating to the Collateral;
(f) execute documents, instruments and agreements required hereunder; and
(g) file UCC

-4-

--------------------------------------------------------------------------------

 

financing statements; provided, however, that Secured Party shall not exercise
any such powers granted pursuant to subsections (a) through (f) prior to the
occurrence of an Event of Default and shall only exercise such powers during the
continuance of an Event of Default. Company agrees to reimburse Secured Party
upon demand for any reasonable costs and expenses, including attorneys’ fees,
Secured Party may incur while acting as Company’s attorney-in-fact hereunder,
all of which costs and expenses are included in the Obligations. It is further
agreed and understood between the parties hereto that such care as Secured Party
gives to the safekeeping of its own property of like kind shall constitute
reasonable care of the Collateral when in Secured Party ‘s possession; provided,
however, that Secured Party shall not be required to make any presentment,
demand or protest, or give any notice and need not take any action to preserve
any rights against any prior party or any other person in connection with the
Obligations or with respect to the Collateral.
     6. Default and Remedies.
          (a) Default. Company shall be deemed in default under this Security
Agreement upon the occurrence and during the continuance of an Event of Default
(as defined in the Note).
          (b) Remedies. Upon the occurrence and during the continuance of any
such Event of Default, Secured Party shall have the rights of a secured creditor
under the UCC, all rights granted by this Security Agreement and by law,
including the right to: (a) require Company to assemble the Collateral and make
it available to Secured Party at a place to be designated by Secured Party; and
(b) prior to the disposition of the Collateral, store, process, repair or
recondition it or otherwise prepare it for disposition in any manner and to the
extent Secured Party deems appropriate. Company hereby agrees that ten
(10) days’ notice of any intended sale or disposition of any Collateral is
reasonable.
          (c) Application of Collateral Proceeds. The proceeds and/or avails of
the Collateral, or any part thereof, and the proceeds and the avails of any
remedy hereunder (as well as any other amounts of any kind held by Secured Party
at the time of, or received by Secured Party after, the occurrence and during
the continuance of an Event of Default) shall be paid to and applied as follows:
               (i) First, to the payment of reasonable costs and expenses,
including all amounts expended to preserve the value of the Collateral, of
foreclosure or suit, if any, and of such sale and the exercise of any other
rights or remedies, and of all proper fees, expenses, liability and advances,
including reasonable legal expenses and attorneys’ fees, incurred or made
hereunder by Secured Party;
               (ii) Second, to the payment to Secured Party of the amount then
owing or unpaid to Secured Party (to be applied first to accrued interest and
second to outstanding principal);
               (iii) Third, to the payment of other amounts then payable to
Secured Party under any of the Transaction Documents; and
               (iv) Fourth, to the payment of the surplus, if any, to Company,
its successors and assigns, or to whomsoever may be lawfully entitled to receive
the same.
     7. Miscellaneous.
          (a) Notices. Except as otherwise provided herein, all notices,
requests, demands, consents, instructions or other communications to or upon
Company or Secured Party under this Security Agreement shall be delivered in
accordance with Notice provision of the Note.

-5-

--------------------------------------------------------------------------------

 

          (b) Termination of Security Interest. Upon the payment or satisfaction
in full of all Obligations (including pursuant to the offset provisions in the
Note) and the cancellation or termination of any commitment to extend credit,
the security interest granted herein shall terminate and all rights to the
Collateral shall revert to Company.
          (c) Nonwaiver. No failure or delay on Secured Party ‘s part in
exercising any right hereunder shall operate as a waiver thereof or of any other
right nor shall any single or partial exercise of any such right preclude any
other further exercise thereof or of any other right.
          (d) Amendments and Waivers. This Security Agreement may not be amended
or modified, nor may any of its terms be waived, except by written instruments
signed by Company and Secured Party. Each waiver or consent under any provision
hereof shall be effective only in the specific instances for the purpose for
which given.
          (e) Assignments. This Security Agreement shall be binding upon and
inure to the benefit of Secured Party and Company and their respective
successors and assigns; provided, however, that Company may not sell, assign or
delegate rights and obligations hereunder without the prior written consent of
Secured Party.
          (f) Cumulative Rights, etc. The rights, powers and remedies of Secured
Party under this Security Agreement shall be in addition to all rights, powers
and remedies given to Secured Party by virtue of any applicable law, rule or
regulation of any governmental authority, any Transaction Document or any other
agreement, all of which rights, powers, and remedies shall be cumulative and may
be exercised successively or concurrently without impairing Secured Party’s
rights hereunder. Company waives any right to require Secured Party to proceed
against any person or entity or to exhaust any Collateral or to pursue any
remedy in Secured Party’s power.
          (g) Partial Invalidity. If at any time any provision of this Security
Agreement is or becomes illegal, invalid or unenforceable in any respect under
the law or any jurisdiction, neither the legality, validity or enforceability of
the remaining provisions of this Security Agreement nor the legality, validity
or enforceability of such provision under the law of any other jurisdiction
shall in any way be affected or impaired thereby.
          (h) Expenses. Company shall pay on demand all reasonable fees and
expenses, including reasonable attorneys’ fees and expenses, incurred by Secured
Party in connection with custody, preservation or sale of, or other realization
on, any of the Collateral or the enforcement or attempt to enforce any of the
Obligations which is not performed as and when required by this Security
Agreement.
          (i) Entire Agreement. This Security Agreement taken together with the
other Loan Documents constitute and contain the entire agreement of Company and
Secured Party and supersede any and all prior agreements, negotiations,
correspondence, understandings and communications among the parties, whether
written or oral, respecting the subject matter hereof.
          (j) Other Interpretive Provisions. References in this Security
Agreement and each of the other Loan Documents to any document, instrument or
agreement (a) includes all exhibits, schedules and other attachments thereto,
(b) includes all documents, instruments or agreements issued or executed in
replacement thereof, and (c) means such document, instrument or agreement, or
replacement or predecessor thereto, as amended, modified and supplemented from
time to time and in effect at any given time. The words “hereof,” “herein” and
“hereunder” and words of similar import when used in this Security Agreement or
any other Loan Document refer to this Security Agreement or such other Loan
Document, as the case may be, as a whole and not to any particular provision of
this Security Agreement

-6-

--------------------------------------------------------------------------------

 

or such other Loan Document, as the case may be. The words “include” and
“including” and words of similar import when used in this Security Agreement or
any other Loan Document shall not be construed to be limiting or exclusive.
          (k) Governing Law. This Security Agreement shall be governed by and
construed in accordance with the laws of the State of Minnesota without
reference to conflicts of law rules (except to the extent governed by the UCC).
          (l) Counterparts. This Security Agreement may be executed in any
number of counterparts, each of which shall be an original, but all of which
together shall be deemed to constitute one instrument.
[The remainder of this page is intentionally left blank]

-7-

--------------------------------------------------------------------------------

 

     IN WITNESS WHEREOF, each of the below-named entities has caused this
Security Agreement to be executed as of the day and year first above written.

            ATS Medical, Inc., a Minnesota corporation
      By:   /s/ Michael Kramer         Its: Chief Financial Officer        3F
Therapeutics, Inc., a Delaware corporation
      By:   /s/ Michael Dale         Its: Chief Executive Officer        ATS
Acquisition Corp., a Minnesota corporation
      By:   /s/ Michael Kramer         Its: Chief Financial Officer     

          MEDTRONIC, INC.
a Minnesota corporation,

as Secured Party
    By:   /s/ Chad Cornell      Name:   Chad Cornell      Title:   Vice
President – Corporate Development     

[Signature page to Security Agreement]

 

--------------------------------------------------------------------------------

 

ATTACHMENT 1
TO SECURITY AGREEMENT
Capitalized terms used herein and not otherwise defined herein have the meanings
given to them in the Security Agreement to which this Attachment 1 is attached.
The Collateral consists of all of Company’s right, title and interest in and to
the following personal property:
     All goods, Accounts (including health-care receivables), Equipment,
Inventory, contract rights or rights to payment of money, leases, license
agreements, franchise agreements, General Intangibles (except as provided
below), commercial tort claims, documents, instruments (including any promissory
notes), chattel paper (whether tangible or electronic), cash, deposit accounts,
all certificates of deposit, fixtures, letters of credit rights (whether or not
the letter of credit is evidenced by a writing), securities, and all other
investment property, supporting obligations, and financial assets, whether now
owned or hereafter acquired, wherever located; and
     all Company’s Books relating to the foregoing, and any and all claims,
rights and interests in any of the above and all substitutions for, additions,
attachments, accessories, accessions and improvements to and replacements,
products, proceeds and insurance proceeds of any or all of the foregoing.
     Notwithstanding the foregoing, the Collateral does not include
(a) Intellectual Property, (b) any lease, license, contract, instrument or
agreement to which any Company is a party, if and so long as the pledge of, or
grant of a security interest therein or in property subject thereto would result
in (i) a breach of applicable law or (ii) a breach, termination or default under
the terms of such lease, license, contract, instrument or agreement or any
agreement to which such property is subject (in each case, other than to the
extent that any such term would be rendered ineffective pursuant to
Sections 9-406, 9-407, 9-408 or 9-409 of the UCC); provided, however, that to
the extent severable, the Collateral shall include and the security interest
shall attach immediately to any portion of such lease, license, contract,
instrument or agreement that does not result in any consequences specified in
subclauses (i) and (ii) above; (c) any Equipment owned by any Company that is
subject to a purchase money Lien or a capital lease, in each case, if the
agreement pursuant to which such Lien is granted (or in the documents providing
for such Lien or capital lease) prohibits the grant of a security interest under
this Security Agreement or requires the consent of any person other than such
Company which has not been obtained, provided, however, that the Collateral
shall include and such security interest shall attach immediately at such time
as the condition shall be removed or to the extent such prohibitions shall be
rendered ineffective pursuant to Sections 9-406, 9-407, 9-408 or 9-409 of the
UCC or (d) more than 65% of the outstanding equity interests in a subsidiary of
a Company which is organized outside of the United States.

 

--------------------------------------------------------------------------------

 

SCHEDULE A
TO SECURITY AGREEMENT
COMPANY PROFILE
     1. Information on Company. Company’s legal name, date and state of
incorporation, organizational identification number and tax identification
number and are as follows:

                                  Organizational         Date of   State of  
Identification   Tax Identification Name   Incorporation   Incorporation  
Number   Number
ATS Medical, Inc.
  June 26, 1987   Minnesota     5P-793     41-1595629
 
                   
3F Therapeutics, Inc.
  June 2, 1998   Delaware     2902908     33-0819893
 
                   
ATS Acquisition Corp.
  June 15, 2007   Minnesota     2399569-2     77-0691131

     2. Existing Permitted Liens.

                      Existing   Type of Filing/   Date of Filing/   Filing/
Recording   Description of Secured Party   Recording   Recording   Number  
Collateral
Northland
Financial
  UCC   06/07/2005     200516812964          All equipment and personal property
under Lease Schedule #2 dated May 26, 2005 per Master Lease Agmt dtd May 26,
2005 between Carlton Financial Corp (Lessor) & Debtor (Lessee)
 
                   
Northland
Financial
  UCC   06/17/2005     200516939489          All equipment and personal property
under Lease Schedule #1 dated May 26, 2005 per Master Lease Agmt dtd May 26,
2005 between Carlton Financial Corp (Lessor) & Debtor (Lessee)

 

--------------------------------------------------------------------------------

 

                      Existing   Type of Filing/   Date of Filing/   Filing/
Recording   Description of Secured Party   Recording   Recording   Number  
Collateral
U.S. Bancorp
  UCC   04/01/2008     200811209561          “FOR INFORMATIONAL PURPOSES ONLY”:
probably specific equipment (illegible description)
 
                 
 
                   
U.S. Bancorp
  UCC   10/14/2008     200813535374          2 pieces of specific equipment
(only illegible models & SN’s given)
 
                   
Imaging
Alliance Group, LLC
  UCC   08/07/2009     200916980741          Fortis user software, per Rental
Agmt between Secured Party d/b/a (illegible) & Debtor dtd July 29, 2009
 
                   
Key Equipment Finance Inc.
  UCC   05/18/2005     200516566242          Canon Image Runner C5800 w/
finisher, print, scan (s/n illegible)
 
                   
Leaf Funding Inc.
  UCC   07/31/2009     200916911271          “LEASE AGMT FOR NOTIFICATION
PURPOSES ONLY” 4 - Lanier copier systems (model & s/n’s illegible)
 
                   
Cisco
Systems Capital Corporation
  UCC   08/11/2009     200917018694          Leased equipment (illegible
equipment description)
 
                   
Qwest
Communications Company, LLC
  UCC   09/29/2009     200917541199     All leased equipment provided by Secured
Party