EXHIBIT 10.3


 


SECURITY
AGREEMENT


 


 


DATE:    January
17, 2003


 


	
  PARTIES: 

  	
  PKM Properties, LLC 

  c/o Gracon Contracting, Inc.  

  606 24th Avenue South, Suite B12  

  Minneapolis, MN 55454  

  Attention:  Paul K. Miller 

  	
   

  	
  (“Secured Party”) 

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  MedicalCV, Inc. 

  9725 South Robert Trail 

  Inver Grove Heights, MN  55077

  Organizational Identification Number: 
  7J-436

  	
   

  	
  (“Debtor”) 

  



 


 


AGREEMENTS:


 


IN CONSIDERATION of one dollar and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:


 


1.             Grant of Security Interest and
Collateral.  In order to
secure payment and performance of each and every debt, liability and obligation
of every type and description which Debtor may now or at any time hereafter owe
to Secured Party whether such debt, liability or obligation now exists or is
hereafter created or incurred, whether it arises under or is evidenced by this
Security Agreement or any other present or future instrument or agreement or by
operation of law, and whether it is or may be direct or indirect, due or to
become due, absolute or contingent, primary or secondary, liquidated or
unliquidated, or sole, joint, several or joint and several (all such debts,
liabilities and obligations and any amendments, extensions, renewals or
replacements thereof are herein collectively referred to as the “Obligations”),
Debtor hereby grants Secured Party a security interest (the “Security
Interest”) in all of Debtor’s property (the “Collateral”), including
without limitation the following:


 


(a)           Inventory and Goods:  All inventory of Debtor, whether now owned or hereafter acquired
and wherever located and other tangible personal property held for sale or
lease or furnished or to be furnished under contracts of service or consumed in
Debtor’s business, and all goods of Debtor, whether now owned or hereafter
acquired and wherever located, including without limitation all computer
programs embedded in goods;


 


(b)           Equipment: 
All equipment of Debtor, whether now owned or hereafter acquired and
wherever located, including but not limited to all present and future
equipment, machinery, tools, motor vehicles, trade fixtures, furniture,
furnishings, office and recordkeeping equipment and all goods for use in
Debtor’s business, together with all parts, equipment and attachments relating
to any of the foregoing;


 


(c)           Accounts, Contract Rights and Other Rights to Payment:  Each and every right of Debtor to the
payment of money, whether such right to payment now exists or hereafter arises,



 


 


 

















 


whether
such right to payment arises out of a sale, lease, license, assignment or other
disposition of goods or other property by Debtor, out of a rendering of
services by Debtor, out of a loan by Debtor, out of the overpayment of taxes or
other liabilities of Debtor, or otherwise arises under any contract or
agreement, whether such right to payment is or is not already earned by
performance, and howsoever such right to payment may be evidenced, together
with all other rights and interests (including all liens and security
interests) which Debtor may at any time have by law or agreement against any
account debtor or other obligor obligated to make any such payment or against
any of the property of such account debtor or other obligor; all including but
not limited to all present and future debt instruments, chattel papers,
accounts, license fees, contract rights, loans and obligations receivable and
tax refunds;


 


(d)           Instruments: 
All instruments, chattel paper, letters of credit or other documents of
Debtor, whether now owned or hereafter acquired, including but not limited to
promissory notes, drafts, bills of exchange and trade acceptances; all rights
and interests of Debtor, whether now existing or hereafter created or arising,
under leases, licenses or other contracts;


 


(e)           Deposit Accounts and Investment Property:  All right, title and interest of Debtor in
all deposit and investment accounts maintained with any bank, savings and loan
association, broker, brokerage, or any other financial institution, together
with all monies and other property deposited or held therein, including,
without limitation, any checking account, savings account, escrow account,
savings certificate and margin account, and all securities, whether
certificated or uncertificated, security entitlements, securities accounts,
commodity contracts, and commodity accounts; and


 


(f)            General Intangibles:  All general intangibles of Debtor, whether now owned or hereafter
acquired, including, but not limited to, applications for patents, patents,
copyrights, trademarks, trade secrets, good will, tradenames, customer lists,
permits and franchises, software, and the right to use Debtor’s name, and any
and all membership interests, governance rights, and financial rights in each
and every limited liability company, and all payment intangibles;


 


together with all
substitutions and replacements for and products of any of the foregoing
property and proceeds of any and all of the foregoing property and, in the case
of all tangible Collateral, together with (i) all accessories,
attachments, parts, equipment, accessions and repairs now or hereafter attached
or affixed to or used in connection with any such goods, (ii) all
warehouse receipts, bills of lading and other documents of title now or hereafter
covering such goods, and (iii) all books and records of Debtor.


 


2.             Representations,
Warranties and Agreements.  Debtor represents, warrants and agrees that:


 


(a)           Debtor is a
corporation duly organized, validly existing and in good standing under the
laws of the state of Minnesota.  This
Security Agreement has been duly and validly authorized by all necessary
corporate action.  Debtor has full power
and authority to execute this Agreement, to perform Debtor’s obligations
hereunder and to subject the Collateral to the Security Interest.  Debtor’s organizational identification
number is the number shown at the beginning of this Agreement.


 


(b)           The Collateral will be used primarily for business
purposes.


 


 


 

















 


(c)           Debtor’s chief place of business is located at the address
shown at the beginning of this Agreement. 
Debtor’s records concerning its accounts and contract rights are kept at
such address.  The Collateral is located
at the address shown at the beginning of this Agreement.  Debtor will give at least 30 days’ advance
written notice to Secured Party of any change in Debtor’s jurisdiction of
organization or chief place of business and any change in or addition of any
Collateral location.


 


(d)           Except as otherwise provided in that certain Discretionary
Credit Agreement, dated as of the date hereof, as amended from time to time,
between the Debtor and the Secured Party (the “Credit Agreement”),
Debtor has (or will have at the time Debtor acquires rights in Collateral
hereafter arising) and will maintain absolute title to each item of Collateral
free and clear of all security interests, liens and encumbrances, except the
Security Interest, and will defend the Collateral against all claims or demands
of all persons other than Secured Party.


 


(e)           Except as otherwise provided in the Credit Agreement,
Debtor will not sell or otherwise transfer or dispose of the Collateral or any
interest therein.


 


(f)            Debtor will not permit any tangible Collateral to be
located in any state (and, if a county filing is required, in any county) in
which a financing statement covering such Collateral is required to be, but has
not in fact been, filed.


 


(g)           All rights to payment and all instruments, documents,
chattel papers and other agreements constituting or evidencing Collateral are
(or will be when arising or issued) the valid, genuine and legally enforceable
obligation, subject to no defense, set-off or counterclaim (other than those
arising in the ordinary course of business) of each account debtor or other
obligor named therein or in Debtor’s records pertaining thereto as being
obligated to pay such obligation. 
Debtor will not agree to any modification, amendment or cancellation of
any such obligation without Secured Party’s prior written consent except
discounts provided by Debtor in the ordinary course of business, and will not
subordinate any such right to payment to claims of other creditors of such
account debtor or other obligor.


 


(h)           Debtor will keep all tangible Collateral in good repair,
working order and condition, normal depreciation excepted, and will, from time
to time, replace any worn, broken or defective parts thereof.


 


(i)            Except as otherwise provided in the Credit Agreement,
Debtor will promptly pay all taxes and other governmental charges levied or
assessed upon or against any Collateral or upon or against the creation,
perfection or continuance of the Security Interest.


 


(j)            Debtor will promptly notify Secured Party of any material
loss of or damage to any Collateral or of any adverse change in the prospect of
payment of any material sums due on or under any instrument, chattel paper,
account or contract right constituting Collateral.


 


(k)           Debtor will if Secured Party at any time so requests
(whether the request is made before or after the occurrence of an Event of
Default), promptly deliver to Secured Party any instrument, document or chattel
paper constituting Collateral, duly endorsed or assigned by Debtor to Secured
Party.


 


 


 

















 


(l)            Debtor will at all times keep all tangible Collateral
insured against risks of fire (including so-called extended coverage), theft,
and such other risks and in such amounts as Secured Party may reasonably
request, with any loss payable to Secured Party to the extent of its interest.


 


(m)          If any Collateral is covered by a certificate of title,
Debtor will from time to time execute such documents as may be required to have
the Security Interest properly noted on a certificate of title.  Debtor authorizes Secured Party to file from
time to time such financing statements against the Collateral described as “all
assets” or the like as Secured Party deems necessary or useful to perfect the
Security Interest.


 


(n)           Debtor will pay when due or reimburse Secured Party on
demand for all costs of collection of any of the Obligations and all other
out-of-pocket expenses (including in each case all reasonable attorneys’ fees)
incurred by Secured Party in connection with the creation, perfection,
satisfaction or enforcement of the Security Interest or the execution or
creation, continuance or enforcement of this Security Agreement or any or all
of the Obligations.


 


(o)           Debtor will execute, deliver or endorse any and all
instruments, documents, assignments, security agreements and other agreements
and writings which Secured Party may at any time reasonably request in order to
secure, protect, perfect or enforce the Security Interest and Secured Party’s
rights under this Security Agreement.


 


(p)           Debtor will not use or keep any Collateral, or permit it
to be used or kept, for any unlawful purpose or in violation of any federal,
state or local law, statute or ordinance.


 


If Debtor at any time fails
to perform or observe any agreement contained in Sections 2(h) through 2(o),
immediately upon the occurrence of such failure, without notice or lapse of time,
Secured Party may (but need not) perform or observe such agreement on behalf
and in the name, place and stead of Debtor (or, at Secured Party’s option, in
Secured Party’s own name) and may (but need not) take any and all other actions
which Secured Party may reasonably deem necessary to cure or correct such
failure (including, without limitation, the payment of taxes, the satisfaction
of security interests, liens, or encumbrances, the performance of obligations
under contracts or agreements with account debtors or other obligors, the
procurement and maintenance of insurance, the execution of financing
statements, the endorsement of instruments, and the procurement of repairs,
transportation or insurance); and, except to the extent that the effect of such
payment would be to render any loan or forbearance of money usurious or
otherwise illegal under any applicable law, Debtor shall thereupon pay Secured
Party on demand the amount of all moneys expended and all costs and expenses
(including reasonable attorneys’ fees) incurred by Secured Party in connection
with or as a result of Secured Party’s performing or observing such agreements
or taking such actions, together with interest thereon from the date expended
or incurred by Secured Party at the highest rate then applicable to any of the
Obligations.  To facilitate the
performance or observance by Secured Party of such agreements of Debtor, Debtor
hereby irrevocably appoints (which appointment is coupled with an interest)
Secured Party, or its delegate, as the attorney-in-fact of Debtor with the
right (but not the duty) from time to time to create, prepare, complete,
execute, deliver, endorse or file, in the name and on behalf of Debtor, any and
all instruments, documents, financing statements, applications for insurance
and other agreements and writings required to be obtained, executed, delivered
or endorsed by Debtor under this Section 2.


 


 


 

















 


3.             Lock Box; Collateral Account.  If Secured Party so requests at any time
after the occurrence of an Event of Default (as defined in Section 7 of this
Agreement), Debtor will direct each of its account debtors to make payments due
under the relevant account or chattel paper directly to a special lock box to
be under the control of Secured Party (the “Lock Box”).  Debtor hereby authorizes and directs Secured
Party to deposit into a special collateral account to be established and
maintained with Secured Party (the “Collateral Account”) all checks,
drafts, and cash payments received in the Lock Box.  All deposits in the Collateral Account shall constitute proceeds
of Collateral and shall not constitute payment of any Obligation.  At its option, Secured Party shall, at any
time, apply finally collected funds on deposit in the Collateral Account to the
payment of the Obligations in such order of application as Secured Party may
determine, or permit Debtor to withdraw all or any part of the balance.  If a Lock Box is so established, Debtor
agrees that it will promptly deliver to Secured Party, for deposit into the
Lock Box, all payments on accounts and chattel paper received by it.  All such payments shall be delivered to
Secured Party in the form received (except for Debtor’s endorsement where
necessary).  Until so deposited, all
such payments on accounts and chattel paper received by Debtor shall be held in
trust by Debtor for and as the property of Secured Party and shall not be
commingled with any funds or property of Debtor.


 


4.             Account Verification and
Collection Rights of Secured Party.  Secured Party shall have the right to verify any accounts in the
name of Debtor or in Secured Party’s own name; and Debtor, whenever requested,
shall furnish Secured Party with duplicate statements of the accounts, which
statements may be mailed or delivered by Secured Party for that purpose.  Whether or not Secured Party exercises its
rights under Section 3 of this Agreement, Secured Party may at any time
(whether before or after the occurrence of an Event of Default) notify any
account debtor or any other person obligated to pay any amount due, that such
chattel paper, account or other right to payment has been assigned or
transferred to Secured Party for security and shall be paid directly to Secured
Party.  If Secured Party so requests at
any time (whether before or after the occurrence of an Event of Default),
Debtor will so notify such account debtors and other obligors in writing and
will indicate on all invoices to such account debtors or other obligors that
the amount due is payable directly to Secured Party.  At any time after Secured Party or Debtor gives such notice to an
account debtor or other obligor, Secured Party may (but need not), in Secured
Party’s own name or in Debtor’s name, demand, sue for, collect or receive any
money or property at any time payable or receivable on account of, or securing,
any such chattel paper, account or other right to payment, or grant any
extension to, make any compromise or settlement with or otherwise agree to
waive, modify, amend or change the obligations (including collateral
obligations) of any such account debtor or other obligor.


 


5.             Assignment of Insurance.  Debtor hereby assigns to Secured Party, as
additional security for the payment of the Obligations, any and all moneys
(including but not limited to proceeds of insurance and refunds of unearned
premiums) due or to become due under, and all other rights of Debtor under or
with respect to, any and all policies of insurance covering the Collateral, and
Debtor hereby directs the issuer of any such policy to pay any such moneys
directly to Secured Party.  Both before
and after the occurrence of an Event of Default, Secured Party may (but need
not), in Secured Party’s own name or in Debtor’s name, execute and deliver
proofs of claim, receive all such moneys, endorse checks and other instruments
representing payment of such moneys, and adjust, litigate, compromise or
release any claim against the issuer of any such policy.


 


6.             Right to Offset.  Nothing in this Agreement shall be deemed a
waiver or prohibition of Secured Party’s right of banker’s lien, offset, or
counterclaim, which right Debtor hereby grants to Secured Party.


 


 


 

















 


7.             Events of Default.  The occurrence of any Event of Default, as
defined in Section 10.1 of the Credit Agreement, shall constitute an Event
of Default hereunder.


 


8.             Remedies Upon Event of Default.  Upon the occurrence of an Event of Default
and at any time thereafter until such Event of Default is cured to the written
satisfaction of Secured Party, Secured Party may exercise any one or more of
the rights or remedies set forth in Section 10.2 of the Credit Agreement.  All rights and remedies of Secured Party
shall be cumulative and may be exercised singularly or concurrently, at Secured
Party’s option, and the exercise or enforcement of any one such right or remedy
shall neither be a condition to nor bar the exercise or enforcement of any
other.


 


9.             Other Personal Property.  If at the time Secured Party takes
possession of any tangible Collateral, any goods, papers or other properties of
Debtor, not affixed to or constituting a part of such Collateral, are located
or to be found upon or within such Collateral, Debtor agrees to notify Secured
Party in writing of that fact, describing the property so located or to be
found, within 7 calendar days after the date on which Secured Party took
possession. Unless and until Secured Party receives such notice from Debtor,
Secured Party shall not be responsible or liable to Debtor for any action taken
or omitted by or on behalf of Secured Party with respect to such property without
actual knowledge of the existence of any such property or without actual
knowledge of the fact that it was located or to be found upon such Collateral.


 


10.          Amendment; Waivers.  This Agreement can be waived, modified,
amended, terminated or discharged, and the Security Interest can be released,
only explicitly in a writing signed by Secured Party and Debtor.  A waiver shall be effective only in the
specific instance and for the specific purpose given.  Mere delay or failure to act shall not preclude the exercise or
enforcement of any of Secured Party’s rights or remedies.


 


11.          Notices.  All notices to be given to Debtor shall be
deemed sufficiently given if mailed by registered or certified mail, postage
prepaid, or delivered to Debtor at Debtor’s address set forth above or at the
most recent address shown on Secured Party’s records.


 


12.          Miscellaneous.  Secured Party’s duty of care with respect to
Collateral in its possession (as imposed by law) shall be deemed fulfilled if
Secured Party exercises reasonable care in physically safekeeping such
Collateral or, in the case of Collateral in the custody or possession of a
bailee or other third person, exercises reasonable care in the selection of the
bailee or other third person, and Secured Party need not otherwise preserve,
protect, insure or care for any Collateral. 
Secured Party shall not be obligated to preserve any rights Debtor may
have against prior parties, to realize on the Collateral at all or in any
particular manner or order, or to apply any cash proceeds of Collateral in any
particular order of application.  This
Agreement shall be binding upon and inure to the benefit of Debtor and Secured
Party and their respective representatives, successors and assigns and shall
take effect when signed by Debtor and delivered to Secured Party, and Debtor
waives notice of Secured Party’s acceptance hereof.  Secured Party may execute this Agreement if appropriate for the
purpose of filing, but the failure of Secured Party to execute this Agreement
shall not affect or impair the validity or effectiveness of this Agreement.


 


(The signature page follows.)


 


 


 

















 


THE
PARTIES have executed this Security Agreement the day and year first above
written.


 


 


	
  Secured Party:

  	
  PKM PROPERTIES, LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Paul K. Miller

  
	
   

  	
  Paul K. Miller,

  Its Chief Executive Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
  Debtor:

  	
  MEDICALCV, INC.

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Blair P. Mowery

  
	
   

  	
  Blair P. Mowery,

  Its Chief Executive Officer